The following is an excerpt from Forbes.
If Energy Future Holdings files for bankruptcy, a buying opportunity may arise in the iShares iBoxx High Yield Corporate Bond ETF (HYG). This would be strictly a short-term trade, appropriate only for aggressive risk-takers, given that high yield bonds are currently overvalued on fundamental grounds.
On March 13, Bloomberg reported that privately held Energy Future was close to obtaining commitments from lenders for approximately $7.2 billion of loans, as part of a plan to achieve a swift reorganization in bankruptcy. This news suggests that the Dallas-based company is close to filing under Chapter 11 of the Bankruptcy Code.
If Energy Future does seek protection under the Code, it will be an anticlimax. Way back in August 2009, Moody’s Investors Service downgraded the company to Caa3, a rating that implies a greater than 25% probability of default within one year. (In 2010 Moody’s withdrew its rating altogether.)
Like the rating agencies, the market has long perceived a high risk of default in Energy Future’s bonds, which trade under the ticker TXU. The TXU bonds in the BofA Merrill Lynch U.S. High Yield Index currently trade at an average price of $56. By comparison, last year’s defaulting bonds were quoted at an average price of $54 shortly after default, according to Edward Altman of New York University.
Read the entire Forbes article here.