Why is Warren Buffett Buying $2.1 Billion of Super-Junky TXU Debt?

Warren Buffett just bought a huge chunk of TXU debt at a $125 million discount to face value:

Berkshire 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%.

According to a wire story by Matt Fuller which isn't online, the 10.25% bonds mature in 2015 and are rated CCC, while the PIK-toggle bonds mature in 2016 but are callable after 2012, which is also the date at which the PIK toggle is activated. The issuer is not actually TXU but a subsidiary, Texas Competitive Electric Holdings.

This is really junky debt. This is what S&P has to say about what a CCC rating means:

An obligation rated 'CCC' is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.

The PIK toggle (which stands for "payment in kind") is particularly toxic, especially on a deal as junky as this one. (My favorite part of the whole story comes in Matt Fuller's wire story, where he refers to the first bond as a "cash-pay tranche". Now that's what I call a retronym.)

In any case, it's fascinating to me that Warren Buffett seems perfectly happy to buy up $2.1 billion of this paper. Maybe he thinks that TXU is too politcally well-connected to be allowed to default, and he's making a moral-hazard play. Or... maybe he's making a stealth takeover bid for TXU himself, buying up the senior debt in the expectation that it will default and that he will be able to convert it into cheap equity.

Update: The stealth-equity theory gets some support. DealBook says CNBC is reporting that Buffett isn't interested in junk debt generally, only TXU's in particular.