Legendary investor Warren Buffett, who disdains private-equity firms and once famously compared them to porn shop operators, finds himself in the awkward position of being at the mercy of one: buyout baron Henry Kravis.
Energy Future Holdings -- which is backed by Kravis' firm, KKR & Co. -- is pushing Buffett, who holds $2 billion of EFH bonds, and other debtholders to take a sizable loss on their investment in the Dallas energy giant.
Formerly known as TXU, Energy Future has been trying to restructure its massive $40 billion debt load stemming from its leveraged buyout by KKR, TPG Capital and Goldman Sachs in 2007, the largest LBO ever.
WARREN BUFFETT Staring at a huge loss.
The company is struggling now that gas prices have fallen sharply from the time of the buyout.
EFH wants Buffett and other unsecured bondholders to swap about $6 billion of debt in a subsidiary, known as TCEH, at a discount -- or roughly 70 percent of face value -- for debt that matures later. Last week, EFH persuaded some holders to swap $478 million of debt for $336 million of new debt.
It is still attempting to get Buffett and other holders to exchange much of the remaining $6 billion of bonds for new bonds worth $4 billion, according to a source.
So why would Buffett agree to this? If the TCEH subsidiary goes bankrupt, as analysts predict it will 2014, unsecured bondholders run the risk of not recouping their investment as holders of the new debt would get paid before them.
"You are in a prisoner's dilemma," said one bond trader.
In the past two weeks, TCEH's unsecured bonds that collect interest fell by 7 percent to 62 cents from 66.5 cents, while those that pay interest are trading at around 58 cents, down from 55 cents.
In 2007, Buffett's Berkshire Hathaway bought $2.1 billion of EFH bonds from Goldman at prices between 93 cents and 95 cents on the dollar.
Buffett and Kravis have clashed before. In 1996, Buffett was a Gillette board member when the company was negotiating to buy KKR-controlled Duracell.
The Oracle of Omaha objected to the acquisition because Gillette would be forced to pay KKR roughly $20 million in advisory fees to buy Duracell. Gillette agreed to buy Duracell over Buffett's objections.