International Power's (IP) entry into the refinancing of the 4,000MW Drax coal fired plant in the UK, after original owner AES pulled out in August, was both swift and decisive. International Power upped its bid twice, thus ending a month-long bidding war for a stake in the struggling plant and seeing off rival bids from BHP Billiton, Goldman Sachs International and Miller, McConville, Christen, Hutchison & Waffel.

International Power's stake in Drax will be purely financial. It will have a plant support contract but will not be involved in the operations and maintenance. The deal is not only poular with creditors but has 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.

The intention is to finalise the detailed terms of the restructuring in order to complete the deal by the end of this year.

Given the highly innovative financial engineering in past Drax financings, the restructuring is very complex, involving schemes of arrangement in several jurisdictions and multiple creditors. Legal counsel to Drax Holdings in the UK is Norton Rose with Dresdner Kleinwort Wasserstein as financial advisor and Debevoise & Plimpton as US counsel. Clifford Chance is advising International Power, Allen & Overy is advising the senior banks and Milbank, Tweed, Hadley & McCloy is advising the senior creditors of Drax.

The key to International Power's rapid victory in the four-way race for Drax was paying a higher price for some of the plant's debt. The International Power deal involves taking a 38% stake in Drax and is similar to the original AES restructuring plan but with a major tweak - more cash for Drax's £1.3 billion ($2.2 billion) of senior creditors: AES was offering £60 million, which International Power has more than doubled to £130 million.

Goldman Sachs also offered up to £130 million in cash, and pay out at 64 pence on the pound to creditors. But market sources claim the Goldman offer had more to do with the fact that it was global co-ordinator along with Deutsche for the first Drax refinancing: the first deal involved the issue of 10, 20 and 25 year bonds which refinanced the original bank debt put in place when Drax was acquired by AES in 1999. There were 50 banks in the original Drax syndicate.

Drax's problems stem from its main offtaker - TXU Europe - going to the wall. AES spent a year attempting to restructure but effectively abandoned the plant at the beginning of August after banks refused to accept its financial restructuring offer. The banks then put in their own management team.

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 pulled out.

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

International Power is buying debt on tranche A2 at 71p in the pound as compared with 47p from AES. Tranche C is 1p debt up to a cap of £100 million as compared with a £60 million ceiling from AES. And International Power has offered 55p in the pound up to a cap of £30 million on tranche B where AES was offering nothing at all.

The offer is also backed by £100 million letter of credit on International Power's obligations and the overall tranche structure now breaks down as follows.

Tranche A1 has stayed the same, comprising £400 million running to 2015 with principal repayments due to start in 2007 and a 12-month debt service reserve account.

Tranche A2 is now £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. International has put up a buy-out option on this tranche for creditors who also take up the option on A2 and A3.

The deal is still not a certainty - it needs 75% of creditors to accept it. Senior creditors are to receive 0.25% for backing the plan as will steering committee members on both bank and bond committees. But the hedging banks are still discussing the proposals. The currency hedging banks will be entitled to £8.5 million. The interest rate hedge is around £70 million. Drax Holdings has stated these sums will be novated to Drax and included within the senior level debt tranche. Deutsche Bank and Close Brothers are advising the creditors.

Status: Exclusivity agreement signed

Description: £1.3 billion debt restructuring and sale of 38% equity stake

Sponsor: Drax Holdings/creditors

Equity stake taker: International Power

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 counsel to banks: Allen & Overy

Legal counsel to creditors: Milbank Tweed

Financial advisors to creditors: Deutsche Bank; Close Brothers