KKR, TPG aim to avoid bankruptcy of Energy Future

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Wall Street is giddily anticipating a return to the glory days of private equity, as the proposed Dell has raised expectations. But a sober reminder is that success is hardly guaranteed in this business lurks. Even as more deals get off the ground, the biggest one of all continues to run aground.

As reported by Bloomberg, "Five years after their record- setting leveraged buyout of Energy Future Holdings Corp., KKR & Co. and TPG Capital are moving closer to a possible new milestone: the biggest bankruptcy of a private equity-backed company since the failure of Chrysler Group LLC."

Ouch! This is certainly a reality check.

There was considerable fanfare when the deal for TXU (as the company was then known) was announced. The sheer size ($48 billion including the assumption of debt) made it noteworthy, as did the unprecedented cooperation between the new owners and environmental groups. Many people were rooting for this to work and to prove the value of private equity owners and managers once and for all.

But it simply hasn't worked out that way. When you get right down to the essence of it all, the buyout was a massive bet on natural gas prices. Unfortunately, the new owners bet wrong. Gas prices have plunged over the last five years, pushing the deal to the point of no return.

Negotiations with creditors are underway, as the firm faces a critical October 2014 maturity date on $3.8 billion in loans. Bankruptcy is a real possibility at some point. That would likely trigger a move by some creditors to seize the company, including other alternative investment providers such as Apollo Global Management, Oaktree Capital Group and GSO Capital Partners (owned by Blackstone). Blackstone has also been hired to restructure the debt.

While plenty of skeptics abound, there is still plenty of time to work out a deal. A rise in natural gas prices would help.

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