A rally in Drax Holdings bank debt has left International Power's attempt to take a controlling stake in the 4 GW Drax Power station in northern England in danger of floundering. Creditors holding the climbing bank debt look increasingly likely to shun the London-based IPP's offer to acquire up to £130 million of Drax debt in return for a 34% equity position in Europe's largest power plant, according to Power Finance & Risk, an LMW sister publication.
Creditors' reluctance to cash out their debt positions reflects a sharp rise in the market value of Drax's senior non-recourse bank paper and bonds in recent weeks as the specter of capacity constraints this winter in the U.K. power market has escalated. A straw poll of Drax's bank and institutional creditors made last week suggests very few, if any, are likely to tender their debt to IP come the Dec. 8 deadline for votes to be registered.
Early last week Drax debt--which trades as a combined four-tranche package--was being quoted at 86-87, up from the low 70s last month. The new price implies the A2 tranche will trade around par when the tranches are allowed to trade freely after the restructuring, said one hedge fund investor. "You'd have to be crazy to accept the IP offer given where you can sell in the secondary market," he added. The debt rally has left IP's tender offer deeply out of the money relative to the market value of Drax's soon-to-be-restructured debt. IP is offering creditors 71% of face value for a new £460 million A2 tranche, 10% of face value for a new £94.5 million A2 tranche and 55 pence in the pound for a £338.4 million B tranche. IP is not making an offer for the £400 million A1 tranche.
Drax bondholders and their advisors Close Brothers and Milbank, Tweed, Hadley & McCloy met in New York last Tuesday to discuss their options and the mood at the meeting suggests that most are unlikely to accept IP's tender offer, said one attendee. "The bondholders are well aware of the gap that exists between the market price of Drax debt and International Power's offer," noted one Close Bros. banker, declining further comment on how the bondholders would vote. Lawyers at Milbank declined to comment.
Drax Power will fund the first £15-30 million of notes tendered from its own coffers. A further £10 million of notes need to be tendered to IP for it to land a seat on the Drax Power board, says the Close Bros. banker. Under the terms of the proposed restructuring, IP will receive a £2 million fee from Drax Power if an insufficient number of creditors tender their notes, forcing IP to walk away from Drax.