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An interesting floating-to-fixed swap caught our eye recently. Vistra Energy announced at the end of December that it would buy out 76 per cent of its tax receivable agreement for $476mn, paid in preferred stock that is registered with the SEC and can be sold for cash.
We’ve talked about TRAs before, most notably in the buyout of Sculptor Asset Management last year. TRAs represent the value of future tax savings that typically originate from private partnerships units that swap into public corporation shares (specifically tax shields that result from “stepped-up” tax basis that creates additional depreciation expense).
Pre-IPO shareholders who are swapping their units are entitled to 85 per cent of the benefits realised by the corporation. The idea is that public market investors do not value the tax benefits and so private equity and VC backers want to ensure they extract that value through the TRA payments over time as the company realises them.
The Vistra TRA comes not out of a traditional IPO. Rather, the company was born from a Chapter 11 restructuring. Vistra is the independent merchant power plant portion of the former Energy Future Holdings (née TXU). TXU had been acquired in a record-setting $44bn leveraged buyout in 2007 (a bet on sustained high natural gas prices, which could not have more poorly anticipated the subsequent fracking boom).
EFH filed for bankruptcy in 2014, and Vistra senior creditors — which included the likes of Apollo, Oaktree, Brookfield and Centerbridge — got not only the listed equity in Vistra but their portion of shares of 427.5mn TRA shares created.
According to its most recent 10Q filing, the undiscounted nominal value of the TRA stream is $1.4bn. But the present value on its balance sheet will vary with both discount rates and the estimation of earnings needed to utilise the tax savings.
Here’s how that balance sheet value has evolved by quarter.
The $476mn purchase price for 74 per cent of the TRA shares implies a gross present value of $650mn, roughly what the latest balance sheet value reflects.
The TRAs trade on Wall Street desks like Jefferies, and what stood out to us — and those involved in the transaction — is what Vistra extracted from sellers in exchange for paying the consideration:
Such amendments to the TRA include (i) the removal of the Company’s obligation to provide registered holders of the TRA Rights (“Holders”) with regular reporting and access to information, (ii) limitations on the transferability of the TRA Rights, (iii) removal of certain obligations of the Company in the event it incurs indebtedness and (iv) a change to the definition of “Change of Control.”
Distressed debt mavens will recognise these as so-called exit consents. Bondholders or lenders will get exchanged or cashed out of existing debt and in return will give their permission to the company to change the terms of the remaining debt, often in a way that is punitive to non-participant holdouts.
In this instance, the stub 26 per cent TRA holders who did not swap into the preferred are no longer able to get whatever information Vistra regularly was sending along. And if there is a sale of the company, the Change of Control revision (“if ninety-nine (99) years after the date of this Agreement”) means that a cash-out of the remaining stub TRA due in a sale transaction — previously triggered immediately — would not be required until 2123.
Vistra did not respond to request for comment. Analysts at CreditSights speculated in a recent report that perhaps Vistra was attempting to clean up its capital structure in advance of a possible LBO.
One investor who participated in the Vistra deal said the holders, especially distressed debt funds, were not natural owners of TRAs and were happy to get cashed out at a slight premium to the current trading price. TRAs have historically wreaked havoc in M&A processes, as MainFT described in detail last year in the Sculptor Capital Management situation.
At the same time, several private equity firms and PE-backed companies have run into trouble with shareholders accusing companies of executing sweetheart TRA buyouts, as MainFT also has shown.
Vistra said it may buy out the remaining TRA units outstanding, and if it does so in the next six months, those who participated in this first deal will get paid if subsequent buyouts get a higher price per unit.
Presumably, Vistra wants to eliminate the TRA entirely based on how it has decided to treat the leftovers.
