December 3 2007: 7:39 AM EST
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Buffett buys $2B in TXU bonds

Billionaire Warren Buffett's holding company purchased high-yield bonds issued by the Dallas-based power producer at the end of last week.

By Peter Eavis, senior writer

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(Fortune) -- Warren Buffett put $2 billion of Berkshire Hathaway's cash to work at the end of last week when the company purchased high-yielding bonds issued by Dallas-based power producer TXU Corp., according to a person familiar with the deal.

TXU was bought earlier this year in a landmark $45 billion leveraged buyout led by Kohlberg Kravis Roberts. As with many LBOs carried out in buoyant markets, banks agreed to make large so-called bridge loans to help finance the deal, but they got stuck with those loans when demand dried up for LBO-related debt. TXU can now use the proceeds from the bond sale, whose total size was $3.9 billion, to help pay down the bridge loans. The bonds were issued through a subsidiary.

Buffett's purchase will be welcomed by the banks that made the bridge loans because, since the credit crunch started in the summer, they've had to take large writedowns on LBO debt on their balance sheet. Citigroup (Charts, Fortune 500), Credit Suisse, Goldman Sachs (Charts, Fortune 500), JP Morgan Chase (Charts, Fortune 500) and Lehman Brothers (Charts, Fortune 500) all participated in the debt financing of the TXU buyout, which originally included $11.25 billion of bridge loans.

Berkshire (Charts) bought into two issues by TXU. It purchased $1.1 billion of 10.25% bonds at 95 cents on the dollar to give Buffett an effective yield of 11.2%. And Berkshire bought $1 billion of 10.5% PIK-toggle bonds (bonds whose interest can be paid out in cash or more bonds) for 93 cents on the dollar, producing an effective yield of 11.8%.

Buffett has done well from investing in utilities. In fact, Berkshire purchased stock in TXU in 2002, when it appeared close to bankruptcy, and then sold out at a large profit in 2004.

According to a person familiar with the deal, Buffett was a prime mover behind last week's deal and the banks were happy to play ball because they wanted to reduce exposure to bridge loans. To top of page

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