TXU Debt Sale Set for Monday

Bankers are ready to launch a big buyout financing, sources say.
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Banks will start selling debt tied to

TXU's

(TXU)

leveraged buyout Monday,

TheStreet.com

has learned.

Chatter in the market placed the kickoff of the billion-dollar buyout financing sometime

this week. But the bank group helping to finance the transaction, which includes

Citigroup

(C) - Get Report

and

JPMorgan Chase

(JPM) - Get Report

, is now looking at a Monday launch. TXU, a big Texas utility, is being purchased by a group led by Kohlberg Kravis Roberts, Goldman Sachs and TPG Capital.

Citi and JPMorgan are expected to sell some $5 billion of loans to help finance the private equity group's $32 billion acquisition.

Credit Suisse

(CS) - Get Report

is also involved in the deal, representing TXU.

Banks involved in the deal either declined to comment or did not return calls.

Buyers of TXU agreed to purchase the energy outfit in February and have received the bulk of the regulatory approvals necessary to complete the deal. The big issue for the buyout team is a high-yield credit market that has been seized up for much of the summer.

Banks that offered debt to buyout shops on loose terms are still stuck with more than $300 billion in LBO debt that they hope to sell into the market.

Lack of confidence in the quality of these loans has made it difficult for bankers to unload them. Even after bankers sold $9.4 billion of debt tied to another recent private equity buyout, KKR's purchase of First Data, potential investors are still skittish about the quality of the paper they might be purchasing and how the price of these securities might hold up after financiers get them off their books.

"You still have all this overhang of loan supply. The real question is where does this paper reside long term," one loan investor says.

Banks have largely been shedding leveraged-loan paper at discounts equivalent to 96 cents on the dollar. Traditional buyers don't want to be left with paper that's worth 92 cents, adds the investor.

Thus far, much of the buying contingent in deals, such as First Data, have been high-yield bond investors that have been starved for deals. Those buyers have trekked into the leveraged loan market because relatively rich premiums are being offered for the associated risks of investing in LBO deals.

The fear is that such buyers are simply opportunistic investors that may look to shed their investments in the near term, driving down the price of debt left in the hands of traditional investors.

"You just don't know where this debt is going to be in one or two years," one loan buyer notes.

According to

The Wall Street Journal

, KKR acquired some $400 million of buyout debt in First Data, which it is taking private. The belief among some market players is that KKR will not be holding that debt for very long.

In the immediate term, the markets appear ready to take on more paper with the dearth of new deals. Still, jousting over the price of deals headed to market will still be of paramount concern for potential buyers, which will mean continued haircuts for big banks, since the TXU deal is rife with much-maligned covenant-lite features.

Another debt investor says that potential buyers will be focused on the structure of TXU to make sure that the deal is not set up in ways that might dilute a debtholder's recourse to the underlying assets, should the company begin to flounder.

"The biggest risk is gonna be, Are there holes in the collateral package?" says this investor. "You can get paid for covenants," the investor adds.

But with its straightforward business and its dominant position in the Texas electric market, TXU still should be a relatively easier sale for bankers than First Data.