Bankers Bailing on TXU?

TXU shareholders should hold on to their proxy postage, as Thomson Financial is reporting that the company’s $45 billion buyout could be on the verge of collapse.

The report says that banks led by Citigroup are thinking long and hard about reneging on their $37.2 billion in debt financing commitments, which included $25.9 billion in term loans and $11.3 billion in an unsecured bridge loan. Such a move would likely require the banks to pay a $1 billion breakup fee – not to mention possible legal recriminations and the breach of trust with equity sponsors KKR and TPG. Moreover, it’s not even clear that the lenders could make such a decision unilaterally, or if KKR and TPG would have to accede (which would be unlikely).

In addition to Citigroup, banks involved in the deal include Lehman Brothers, J.P. Morgan, Goldman Sachs and Morgan Stanley.

The $1 billion breakup fee would obviously be a bitter pill for the bankers to swallow, but Citigroup apparently is weighing it against the possibility of post-deal losses due to continued credit spread widening. As Thomson reports: “One observer pointed out that the break-up fee would be cheaper than the current losses of up to 10% on traded loans and bonds for recent buyouts.”

It almost reminds me of a current baseball debate here in Boston, where the beloved Red Sox are contemplating a trade for right fielder Jermaine Dye. One big issue is where Dye would play, given that the Sox have committed $15 per year to underperforming right fielder J.D. Drew. Do you essentially cut bait on a big-ticket investment gone bad (trade for Dye, bench Drew), or stick with it and hope for the best (keep playing Drew).

My guess is that both Citigroup and the Red Sox will do the latter, but fear can be a strong motivator…  Whether it’s of bad loans or the deaded Yankees.