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| Drax Power Station |
Hedge funds are bidding up Drax's debt, betting on movements in the darkspread -- the spread between energy prices and coal-fired generation costs. There is also speculation that a refinancing is in the works that will take out the discounted "B" tranche and put in a place a new capital structure that reflects the current high equity valuation. Last week, the £458 million A2 and £86 million A3 equity tranches traded in the 195 range, while the £338 million "B" tranche traded up to the 97 range. Drax's A2 and A3 tranches trade as a package and are linked to its shares. The buyers of the debt are betting on the rising value of the company's equity through the darkspread, a trader noted. Hedge funds are also buying the equity tranches as they short the underlying commodity exposure, said sources.
The dark/spark spread is the difference between selling power and buying coal. "In the future, the dark/spark spread could stay where it is or get better," the buysider said. But if the dark/spark spread closes, Drax goes back down, he noted. "The underlying electricity prices have improved. That's good for the market and good for Drax," a spokeswoman for the company said. Market participants pointed to portfolio manager Brian Stark of Stark Investments as a possible buyer of the equity tranches. Stark did not return calls.
The buysider also said Drax is looking to refinance the deal. The current structure was put in place when the company filed for bankruptcy and is not ideal now that the generating market in the U.K. has recovered. "They need to detach the A2 and A3 tranches and relieve some debt," he said. But he added that Drax will first take care of the "B" tranche, which corresponds to an approximately £348 million claim for liquidated damages awarded to Drax against TXU Europe Trading and TXU Group. The claim was a result of the non-performance of a long term take-off agreement and reportedly precipitated the commencement of Drax's talks with its creditors in November 2002. The "B" holds the lowest priority in the capital structure. The TXU claim will either be sorted out in the next two or three weeks or will take years, the buysider said. "If they pay out the $348 million, it will fall out of the company's balance sheet and will be more attractive for a buyer," the buysider concluded.
A £400 million A1 piece was quoted, but not traded, around the 101 context. Since the A1 has priority access to the company's cash flow, only bids have been placed on the tranche. Last April, Drax's A1 tranche was quoted in the 98 range, while the A2-A3 tranches traded in the 112 context and the "B" was quoted in the 80 range. Drax's debt started trading almost a year ago after the company completed the restructuring of all its senior secured outstanding debt. Deutsche Bank is the agent bank of the facility.
A buysider at a U.S. fund based in Europe also speculated that Drax ultimately could be acquired by another utility company. "Drax is a strategic asset in the U.K., logically, it should be owned by a utility company."
