Deutsche Bank placed the winning bid for £160 million ($297 million) of British Energy trade claims auctioned off by Teesside Power this month, placing a bet that power prices will continue to rise. As first reported on LMW's Web site last week, the purchase price was set at 125 and market participants said Citigroup placed the cover bid, though one banker disputed the level and said the highest bid was closer to 121.
The approximately $1.3 billion of British Energy's debt will be transformed into 97.5% of the company's equity plus $425 million in new debt once the European Commission approves the company's restructuring plan. The Teesside claims were equivalent to a 14.5% equity stake in the company. "This was the last claim where you could get a significant stake in the company," the source said. If the European Commission gives its approval and power prices hold at current levels, the equity will have 50% upside, a trader noted. 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." The other two major selloffs were from Enron Corp. and TotalFinaElf. The Enron claims were said to be sold off in the 77 context and TotalFinaElf's in the 88 range.
"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 175, up from the 115 level where they were changing hands in the beginning of the year.
Deutsche bank faced stiff competition in its bid. "It was a contested auction. A lot of people [were] invited [and] things were pretty close," a source familiar with the situation added. The investor noted that the banks are two of the biggest distressed debt dealers in Europe and regularly battle it out in these situations.
Deutsche Bank is looking to break the Teesside claims down into two parts, according to one investor, who said the bank is looking to sell the equity portion to equity investors and the debt portion to debt investors. The investor said this would be achieved through selling derivatives of the claims. Bankers at Citi and Deutsche Bank declined comment.