While many investors are shying away from risky junk bonds, Warren Buffett is set to jump into the market with a multi-billion-dollar purchase.
Buffet's Berkshire Hathaway is reportedly paying $2.1 billion to buy TXU junk bonds from Goldman Sachs. Buffett, with a fortune of $52.0 billion, is the world's second-richest person and is famed for his ability to find deals in undervalued securities.
Buffett's purchase, however, is not an endorsement of the junk bond sector. Instead, he told CNBC the purchase is a bet on the utility business.
TXU is a utility that provides electricity to 2.5 million Texans. A consortium of private equity firms led by Kohlberg Kravis Roberts and Texas Pacific Group agreed to buy the company in February for $32 billion. The deal was completed in October.
Buffett said he is comfortable with the bet on utilities because of his familiarity with the sector. Berkshire Hathaway is the majority owner of MidAmerican Energy Holdings. MidAmerican owns stakes in a variety of utilities in the United States and Britain.
Buffett also told CNBC that some new bond issues give new meaning to the word junk. The amount of lowly rated bond issues has soared this year as companies heavily leverage their balance sheets to buy back shares and make acquisitions.
The big supply has not met commensurate demand. In a tumultuous financial year, investors have been shying away from securities like junk bonds. Junk bonds offer owners higher yields than investment-grade debt, but they also carry greater risk of default.
The utility sector traded mostly higher Monday. Shares of Unitil rose 25 cents, or 0.9%, to $27.60; shares of PG&E gained 51 cents, or 1.1%, to $46.78; but shares of Northeast Utilities rose 40 cents, or 1.3%, to $31.98.
The Utilites Select Sector SPDR Fund, an exchange-traded fund that comprises the utility stocks in the Standard & Poor's 500-stock index, was up 0.9%, or 39 cents, at $43.12.
Class B shares of Berkshire Hathaway rose $77.50, or 1.7%, to $4,767.50.