Deutsche Bank placed the winning bid for ₤160 million ($297 million) of British Energy’s trade claims auctioned off by Teesside Power last week. The purchase price was set at 125 and market participants said Citigroup placed the cover bid. One source noted that the banks are two of the biggest distressed debt dealers in Europe and regularly battle it out in these situations. In the British Energy auction, Citi is said to have fallen just short in the end, according to one European-based distressed investor. Bankers at Citi and Deutsche Bank did not return calls for comment.
Distressed investors in both Europe and the U.S. are interested in holding the claims because they will be converted into bonds and equity. Potential investors are then betting on a rise in power prices based on changes introduced by new European carbon emissions legislation (LMW, 6/7). “Power prices will go up to reflect the price of coal and oil,” one dealer said, adding that due to its low cost of production of nuclear energy, British Energy is in prime position to benefit from these changes. “[For British Energy] the macro looks extremely good, the micro is neglected and old and the new management needs to make the stations work,” he added. British Energy bonds are currently trading at 170, up from the 142 level where they were changing hands a month ago.
The conversion of the claims into bonds and equity will take place after the European Commission approves the company’s restructuring plan. If the European Commission gives its approval and power prices hold at current levels, the equity will get a 50% upside, the trader noted. The approval was expected for this month, but it has been delayed. He added that since British Energy is the largest energy producer in the United Kingdom, “it is absolutely inconceivable the European Commission would not approve the state aid.”