Corp. bond default case study - chapter11 bankruptcy

https://www.bondvigilantes.com/blog/2014/05/13/respect-seniors-txu-default-case-study/

2014.April
Energy Future Holdings Corp (formerly known as TXU) filed for Chapter 11 bankruptcy, listing $49.7bn in debt liabilities


"eye-opener" ---
the huge range of recovery values on the various 'tranches' of debt issued by the business.
due to --
the inherent complexity of the company’s capital structure :

The company had 14 separate major bond issues,
issued out of a range of different entities
with differing claims on the company’s various assets


""" ...
This great diversity of debt and different legal entities in the capital structure has meant similar differentiation in recovery values for the bonds. Below are some of the trading levels we currently see in the market for the more liquid bonds.

At one end of the extreme, the TXU 11.75% 2022’s are currently trading at 119.5% of face value whilst the TXU 10.5% 2016’s languish at 8.8 cents in the dollar.

*** The difference in price reflects the bonds’
'relative position in the queue of claims' for the company’s assets.


The difference of experience in terms of total returns from these bonds is also stark. Holders of the 11.75% 2022 bonds enjoyed a capital return of c 20% over the past two years (on top of the 11.75% coupon each year), whereas holders of the 10.25% 2015 bonds have been hit with a capital loss of c.70%.

..."""


-->
"""...
... seniority and position in a capital structure has a major impact when determining potential downside for high yield investors.
Indeed this factor can often be more important in the event of a default than the quality and credit worthiness

...

... the TXU bankruptcy is one of the echoes of the last LBO frenzy of 2006 and 2007, we believe that where you invest in the capital structure will also be important going forward.

When default rates do eventually rise from their currently low levels,
investing in bonds that 'rank senior in a capital' structure will be one way
to limit the potential downside of a high yield portfolio.
..."""