Bank debt levels for European coal stations are soaring as investors bet on electricity prices rising faster than coal prices. The A2-A3 equity tranche of Drax is trading in the 171-173 context up from the 145 range three months ago. Meanwhile, British Energy's Eggborough term loan has traded in the 79 1/2-80 1/2 context, up from the 55 range in April. "All the energy in the U.K. is booming, pushed up by oil prices," a trader said.
Drax's A2 and A3 pieces 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. If the darkspread--the spread between energy prices and coal-fired generation costs--increases, the equity value increases, said a buysider.
"Drax is encouraged by the operating performance that has been achieved so far this year," a Drax spokeswoman said. "Half-year results for the company were better than forecast due to the combined effects of underlying increases in electricity prices, lower than forecast coal prices and load factors leading to improvements in the gross margin."
Meanwhile, Eggborough's levels were boosted by the European Union's final approval of a bailout for British Energy. "Eggborough's debt is part of the British Energy restructuring," the buysider said, adding, the energy colossus is the principal taker of electricity generated by Eggborough and needs a non-nuclear plant to cover for outages. British Energy, which is a nuclear station, acquired the coal station five years ago. An Eggborough spokesman did not return calls.