Ratings agencies: Debt to sink largest-ever LBO target

Moody’s Investors Service has cut its debt ratings on Energy Future Holdings, which was purchased two years ago by TPG, Kohlberg Kravis Roberts and Goldman Sachs Capital Partners in the largest-ever buyout deal closed to date.

Those investors took on most of the EFH’s debt, around $40 billion of which must be paid off, when they acquired it for $45 billion in October 2007. Less than a year after the deal, the company — which was subsequently divided into separate businesses TXU Energy, Luminant and Oncor – reported a $251 million net loss it attributed in part to expenses related to the buyout.

Utilities: Causing conern

Moody’s downgraded its ratings for several of EFH’s debt securities due to its high leverage, limited financial flexibility and increasing likelihood of a default, and cautioned that its business model “does not appear to be sustainable over the long term”. Moody's also said the company has enough money to pay its creditors for the next year, but will likely have to make new financial arrangements because large debt maturities in 2013 and 2014, with $20.4 billion coming due in the latter year.

Ratings agency Fitch also last month cut its outlook for EFH to negative based on shrinking cash flows, while Moody’s added the company may have to take action such as a debt-for-equity exchange in order to address its cash flow problems. However, a spokeswoman for the EFH told the Dallas Morning News the company had sufficient liquidity and capital to fund its business model.

Moody’s report underscores how more firms are increasingly having to deal with refinancing of debt taken on by portfolio companies when they are bought in leveraged buyout deals. During a recent private equity summit in New York, KKR partner Dean Nelson pointed to EFH, as well as hospital operator HCA and electronic commerce firm First Data, as companies that KKR had invested in that have large debt loads.

KKR in March saw its $429 million equity stake in Masonite wiped off the books after the Canadian door-parts maker reached an agreement with its lenders to restructure the bulk of its $2.2 billion in debt, reducing its debt load to $300 million. Charter Communications, whose debt holders include Apollo Global Management and Oaktree Capital Management, also recently filed for bankruptcy protection in an effort to unload at least $8 billion in debt, while Moody’s last month slashed Bain Capital- and TH Lee-owned Clear Channel Communications debt to junk status.

The status of EFH’s buyout as the largest in the US was briefly usurped by the C$52 billion acquisition of Canadian telecoms company BCE by a consortium including Providence Equity Partners, Madison Dearborn Partners and Merrill Lynch Global Private Equity. However, the deal was cancelled in December when KPMG confirmed the company would be insolvent following the buyout.