Drax completed its long restructuring process on December 22, with the majority of lenders having turned down an increased offer from International Power of 95p - up from 71p in the pound - on the junior debt tranches: International Power eventually only acquired £1 million ($1.6 million) of restructured debt.

That the International Power offer was largely refused is symptomatic of a rise in UK wholesale electricity prices, the plant having 50%-plus of its power pre-sold for the next six months and that Drax debt is finally trading almost at par.

The final restructuring was widely welcomed with 99% of creditors accepting it.

The big winners in this are those that bought when Drax was trading at 35p in early 2003 - for example Goldman Sachs and UBS. But the fact that only 28% of secondary debt was sold at that time is a testament to the success of Deutsche Bank and Close Brothers - lead bank debt and bond advisors respectively - in restructuring a deal that meets the often clashing interests of bank and bond lenders.

Since finalizing the restructuring, trading in Drax has picked up as the plant's debt has edged closer to par. BMO Nesbitt Burns recently sold its £42 million non recourse position at 94% of face value. Mizuho has also shed its £43 million in a back to back trade to Deutsche Bank. And the Drax creditor committee now includes a number of distressed debt investors.

On the one hand these trades can be seen as jumping ship while the going is good. On the other, the fact that sellers are finding buyers for Drax gets closer to par is a vote of confidence in the restructuring and the future of the plant.

International Power's entry into the refinancing spawned much of the final restructuring plan despite the failure of its offer. Problems at the 4000MW coal fired plant started when the first symptoms of sickness at offtaker TXU were spotted in September 2002.

AES - then Drax owner - was worried and three bank lenders approached Deutsche Bank for an opinion. When TXU Europe went bust PricewaterhouseCoopers was brought into advise the banks on restructuring, Deutsche started negotiations for a period of standstill on the senior bonds and Close Brothers was appointed to fully represent the interest of the bondholders.

The problem for the parties leading the restructuring was getting the Drax credibility message across to creditors. The plant was performing well, providing 10% of the UK's total electricity and had £200 million in cash. The negative TXU offtake issue had to be separated from the plant's performance.

The standstill agreement was signed in December 2002. What followed was a series of attempts by AES to maintain its stake. But with rival bids from BHP Billiton, Goldman Sachs International, Miller, McConville, Christen, Hutchison & Waffel and finally International Power, AES pulled out in August 2003.

AES had agreed an outline plan with senior creditors but it was clear many wanted to see a new operator in place. When creditors refused to meet an AES deadline on signing the final restructuring plan - AES jumped ship. The banks then put in their own management team under a bank steering committee comprising Deutsche Bank, RBS, Bank of Montreal and Commerzbank.

International Power's bid was not only popular with creditors but pleased bosses at UK Coal, which supplies two-thirds of the plant's fuel: a rival bid from BHP included a clause that could have seen all of Drax's fuel sourced from BHP's overseas pits.

Given the financial engineering in the past two Drax financings, the restructuring is complex, involving schemes of arrangement in England, Jersey and the Cayman Islands and multiple creditors - 50-plus banks and institutional bondholders.

Legal counsel to Drax Holdings in the UK was Norton Rose with Dresdner Kleinwort Wasserstein as financial advisor and Debevoise & Plimpton as US counsel. Clifford Chance acted for International Power, Allen & Overy for the bank steering committee and Milbank, Tweed, Hadley & McCloy for the bondholders.

The key to International Power's offer was paying a higher price for some of the plant's debt. The International Power deal involved taking a 38% stake in Drax and was similar to the original AES restructuring plan but with a major tweak - more cash for Drax's £1.3 billion of senior creditors: AES was offering £60 million which International Power has more than doubled to £130 million.

Despite being similar to AES' plan, the International Power offer came with differences in its tranche structure.

International Power was buying debt on tranche 'A2' at 71p in the pound as compared with 47p from AES. Tranche 'C' was 1p debt up to a cap of £100 million as compared with a £60 million ceiling from AES. And International Power offered 55p in the pound up to a cap of £30 million on tranche 'B' where AES was offering nothing at all. The offer was also backed by a £100 million letter of credit on International Power's obligations which was put in place in November.

The final Drax restructuring is robust with only around 30% as senior debt and the remainder having mezzanine/equity characteristics. The tranche 'A1' senior debt amounts to £400 million running to 2015 with principal repayments due to start in 2007 and a 12-month debt service reserve account.

Tranches 'A2' and 'A3' are now effectively going to follow an electricity price play. Tranche 'A2' totals £460 million with pricing upped from 300bp to 400bp and running until 2015. Principal repayment starts after tranche 'A1' falls below £200 million. Tranche 'A3', which was formerly tranche 'C' and now ranks above tranche 'B', comprises £135.4 million at 500bp running until 2025. Interest and principal repayments are only due after tranches 'A1' and 'A2' are fully repaid.

Tranche 'B' is backed by claims against TXU Europe on Drax's defunct power purchase agreement - £85 million in unpaid amounts and £266 million for contract termination.

The Drax restructuring story is not over. There is a potential argument brewing over how best to divest the plant. Some lenders want to see Drax incorporated into new bank-owned generation company, CGE Power, in return for debt in the new entity. Other creditors would like to see Drax sold to an existing generator for cash. Either way - the restructuring has worked.

Drax Holdings

Status: closed 22 December 2003

Description: £1.3 billion debt restructuring

Sponsor: Drax Holdings/creditors

Bank steering committee: Deutsche Bank; RBS; Bank of Montreal; Commerzbank

Financial advisory bondholders: Close Brothers

Financial advisor to banks: PricewaterhouseCoopers

Legal counsel to Drax: Norton Rose (UK); Debevoise & Plimpton (US)

Financial advisor to Drax: Dresdner Kleinwort Wasserstein

Legal counsel to International Power: Clifford Chance

Legal advisory Cayman Islands: Walkers

Legal advisory Jersey: Mourant