Abbey National, one of seven project finance lenders to the U.K. power sector that are behind CGE, sold a roughly £30 million four-tranche debt and equity position at the beginning of this month. It was shortly followed by HypoVereinsbank and another un-named CGE sponsor, said debt traders. Calls to both firms were not returned.
CGE's sponsors, Abbey, Bayerische Landesbank, HBOS, HVB, Lloyds TSB, Royal Bank of Scotland and WestLB, signed a pact last year preventing any of them from divesting their project debt exposure to key U.K. power plants that CGE intended to acquire. The rationale behind the move was that selling non-recourse debt to investors that weren't supportive of CGE's plant consolidation plans would undermine CGE's ability to acquire assets. CGE tabled a bid to acquire Drax in February.
But, on April 30, CGE's sponsors agreed to relinquish the embargo on selling Drax paper. Within the day Abbey had already liquidated its position and was shortly followed by two other banks. One financier says the sudden pickup in selling pressure caused Drax paper to fall sharply in price. The A2/A3 and equity tranches--which trade as a single package--softened in price from near 120 before the sale to 112 last week. "They're cutting each others throats as they scramble to get out of Drax," quipped one broker. But not all commentators agree that the selling caused Drax bond prices to fall. Michael Ridley, a debt analyst at Citigroup in London, says the whole high-yield market has softened in recent weeks.
Perhaps of longer term significance, the debt sales also cast a pall over CGEs much-vaunted plan of building a 12 GW U.K. IPP. Drax was supposed to be the cornerstone of the new IPP, said one financier, who added that without the plant CGE is unlikely to achieve quite such a critical mass. "I never thought it was likely that CGE would acquire [Drax]. It's too big an asset," said Ridley.
An official close to CGE denies that it has given up on plans to acquire Drax, but concedes that any tie-up is now on the back burner. "It's not a priority for CGE at this moment, but it may come back later." The official added that removing Drax from its shopping list will allow CGE to better focus on acquiring smaller more accessible power plants.