Kohlberg Kravis Roberts and Co (KKR) and Texas Pacific Group (TPG) have announced a leveraged buyout transaction (LBO) to take over Texas based power utility TXU Corporation (a press report here) for a record breaking USD 45 billion.
This marks the first time that the size of a buyout deal has crossed USD 40 bn leaving behind the Blackstone group’s recent purchase of Equity Office Properties. What’s more, even this USD 45 bn record may be broken, as the merger agreement provides for a so called go-shop period during which TXU may consider offers from other interested buyers.
The price of credit default swaps (which is a close proxy to the risk of owning corporate bonds) moved up sharply in the wake of TXU’s announcement. CDS spreads on TXU’s debt almost doubled to 157 basis points (Bloomberg report) a rise of approximately 73 basis points over one day. CDS spreads of other similar companies too moved sharply higher.
Worlwide, the size of the CDS market is estimated at approximately USD 25 trillion. Such sharp moves in spreads (prices) clearly bring about a lot of pain (and gain). There must have been many a glum (and cheerful) face on trading desks yesterday, but then who said trading is child’s play.
No wonder, the saying goes, traders age many many years in a day.