Warren Buffett recently said that Berkshire Hathaway (BRKA) hasn’t “bought a single company from an LBO operator,” because such sellers only focus on “exit strategy” and “don’t know the business.” It’s not quite the same as equating buyout barons with adult bookstore owners, but you can’t blame the 80 year-old billionaire for mellowing a bit…
What’s a bit odd, however, is that Buffett’s bias against private equity only applies to one half of a company’s cap table. He won’t acquire a PE-backed company’s equity, but he is willing to buy up its debt.
Case in point is Energy Future Holdings (f.k.a. TXU), the Texan energy giant taken private in 2007 by KKR and TPG Capital. The $48 billion deal represented the largest leveraged buyout in history, and included a whopping $40 billion in debt.
Buffett was among the bondholders, acquiring around $2 billion of EFH securities at a slight discount to cost in 2007. They’ve since gotten hammered, with some of the notes trading as low as 55 cents on the dollar (those paying interest are around a dime higher).
Seems the following equation has applied: Overleveraged buyout+Plummeting gas prices=Big trouble.
Now, the NY Post reports that KKR and TPG are asking Buffett and other bondholders to take a severe haircut:
EFH wants Buffett and other unsecured bondholders to swap about $6 billion of debt in a subsidiary, known as TCEH, at a discount — or roughly 70 percent of face value — for debt that matures later. Last week, EFH persuaded some holders to swap $478 million of debt for $336 million of new debt.
The article does not report Buffett’s reply to the request, but quotes a bond trader as saying that Buffett is stuck in a “prisoner’s dilemma.”
If he fights and EFH doesn’t do a large enough bond exchange, then the company will almost certainly default on its obligations. If he gives in, he automatically loses money and enables an action that S&P recently said would be the equivalent of a default. Heads he loses, tails he loses.
Guess this helps explain why Buffett maintains such hostility toward private equity. One just has to wonder why he got involved with it in the first place…