The S&P/LSTA Leveraged Loan Index recorded its second highest jump ever after an index rebalancing that removed three Texas Competitive Electric Holdings (TCEH) debt facilities following the parent company’s exit from bankruptcy.
The bid for the Index jumped by 154 bps, to 96.85 from 95.31.
The S&P/LSTA Loan 100 Index, with the largest facilities in the Index, advanced by 523 bps to 97.67 from 92.44, which was the largest move of the Loan 100 Index of all time.
The pre-petition loans totaled approximately $22.655 billion when parent Energy Future Holdings filed for bankruptcy in April 2014, court documents showed. TCEH is the largest issuer in the Index of all time. The EFH bankruptcy filing triggered a jump in Index loan default rates to a nearly four-year high of 4.64% by amount, from 1.21%. Thus began dual-track default-rate reporting for the leveraged loan market. Excluding EFH, the rate dropped to an 18-month low at the time of 1.14%, from 1.21%.
TCEH, itself the parent of TXU and Luminant, exited bankruptcy on Oct. 4. The plan for Energy Future Holdings’ so-called T-side provides for a tax-free spin-off of TCEH, the company’s energy-generation and retail businesses. Under the plan, confirmed by the Wilmington, Del., bankruptcy court in August, TCEH first-lien creditors received 100% of the equity of the reorganized company and 100% of TCEH’s cash.
The reorganization process for the company’s E-side, made up of Energy Future Holdings (EFH) and intermediate holding company Energy Future Intermediate Holdings (EFIH), and premised on the sale of Oncor, is moving forward separately. NextEra Energy agreed to buy Oncor in a deal valued at $18.7 billion this summer, months after an earlier deal with Hunt Consolidated fell apart. A confirmation hearing for the E-side is set to begin on Dec. 1.
The Index will see another massive repayment when the E-Side completes its restructuring and exits from Chapter 11. Under the terms of the NextEra-Oncor deal, lenders to EFIH’s $5.4 billion DIP loan will be repaid in full, in cash. That deal is expected to close early next year.
The largest move of the Index was on Jan. 6, 2009, when the bid for the Index jumped to 63.66, from 62.11, a 155 bps gain. The S&P/LSTA Loan 100 Index gained 214 bps on that day, from 62.83 to 64.96.
On that day, Lyondell Chemical Company filed for bankruptcy for its U.S. units in New York after missing debt-service payments on $8 billion of LBO bridge loans. LyondellBasell term debt was active and higher, but many names contributed to the significant move. At the time, the loan market was enjoying a broad rally that began in late 2008 as high-yield bond and equities markets improved.
Gains in the loan market at that time were also attributable to a reversal of technicals to favor loan investors. A bruising string of BWIC activity had subsided. Moreover, new issues remained scant, resulting in an outsized effect on secondary prices due to year-end amortization payments, including the repayment of Alltel‘s $14 billion institutional term loan.
Despite an end-of-year rally in 2008, loans logged their sixth successive month of red ink in December 2008, with a 2.95% loss, capping off the longest losing streak on record.
All told, the Index was off 29.10% in 2008, a staggering result by any measure. It was the loan market’s first annual loss after 11 straight years of positive returns, dating from the start of the S&P/LSTA Index, in 1997, through 2007.
EFH landed in bankruptcy on April 19, 2014, after two years of publicly discussing Chapter 11 as a viable option. The company began experiencing financial troubles soon after its massive 2007 LBO.
When its debt came to market, the buyout of Dallas-based TXU by Kohlberg Kravis Roberts and Texas Pacific Group was backed by $31.65 billion in financing, making it the largest LBO ever. (The deal for the company also included investments from TPG Capital and Goldman Sachs.)
The transaction was valued at $45 billion, including the assumption of debt. Sponsors contributed $8 billion in equity. Senior leverage was 4.8x, and total leverage was about 6.9x, according to sources. The deal was announced in February 2007, through delays as a result of the credit crisis pushed completion off until October.
The LBO debt included a $20.4 billion, three-part loan, as a $16.45 billion, seven-year B term loan (a $3.45 billion B-1, a $7 billion B-2, and a $6 billion B-3); $2.7 billion, six-year revolving credit, a $1.25 billion deposit LC facility, and a $4.1 billion delayed-draw term loan, of which $2.15 billion already is drawn.
There was also a $2 billion, six-year revolving credit, and a $7.5 billion, three-part bond offering. The financing included an approximate $3.75 billion balance on the $11.25 billion bridge financing.
Industry watchers soon realized the LBO was a bad bet. Following the decline of natural gas prices, the company’s earnings plummeted, and under the weight of its crushing debt it filed for bankruptcy. — Kelsey Butler/Abby Latour
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