2007 was the peak of the last LBO boom and TXU was one of the last and most aggressive transactions of that year. At the time, yield spreads were extremely tight, prompting buyers to reach for higher returns. That demand helped finance a surge in LBO activity.
Flash forward to the present: Tight yield spreads on corporate bonds once again have investors hungering for higher returns. LBO activity has exploded recently and with today’s low interest rates expected to rise, floating-rate loans are in demand.
Since 2012, investors have poured $82.5 billion into high-yield leveraged loans, which are often used to finance buyouts. Look for more TXUs to surface as risky debt matures.
The bankruptcy is the 11th largest in history and one of the largest failures of a company in private-equity hands. Several deals involving United States companies that were taken private during the buyout boom era, from 2005 to 2007, have turned out to be big winners. The buyouts of the hospital giant HCA, Hilton Hotels and the energy company Kinder Morgan yielded big returns for the buyout kings and their investors. Still, other prominent deals of the era, including the $27 billion buyout of the First Data Corporation in 2007, the $23 billion acquisition of Clear Channel Communications in 2008 and the $17 billion purchase of Freescale Semiconductor in 2006, are still struggling to manage the mountains of debt that the deal makers piled on them in industries that have not yet rebounded.