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Investors pursue scrap funds from anticipated LBO bankruptcy

After leading the $48 billion buyout of Energy Future Holdings Corp. in 2007, Goldman Sachs and KKR are now in the position of fighting over leftover funds of the corporation. The initial investments made by the companies, along with other investment firms like TPG Capital, were based on the premise that gas prices would continue to increase in the future.

Instead, gas prices have been falling, and the companies have been left without any profits from their investments. To potentially obtain debt relief, Energy Future Holdings is now in the position of filing for bankruptcy, potentially before the end of October, and its equity investors are now fretting about how to proceed to recover funds from the company.

Warren Buffett was another major investor involved in the $48 billion buyout of Energy Future. Buffett's company, Berkshire Hathaway Inc., purchased more than $2 billion of the company's bonds in 2007. Berkshire was able to write off $1 billion of the investment in 2010 and then write off an additional $390 million the next year. Even these significant write-offs did not help Berkshire avoid losing money from the buyout deal, and KKR and TPG have estimated their losses at 5 cents for every dollar. The companies have experienced a 95 percent loss on their original investments in the company. Since there is little to no salvage value left in the energy company, there will likely be disputes over which creditors will be entitled to receive the first payouts from it.

Bankruptcy may not be an option for Energy Future if lenders do not agree to the restructuring of the company. Secured creditors will likely vote in favor of the restructuring so that they can be paid any money that they are owed while investors like Goldman Sachs may prefer that the company does not file for bankruptcy so that it can attempt to file a claim for funds.

Source: Bloomberg, "KKR to Goldman Skirmish for Scraps as LBO Bankruptcy Looms", Beth Jinks & Richard Bravo, October 21, 2013

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