UK: Drax gets high and mighty
AES' optimisation, or refinancing, of the Drax deal goes further
than was anticipated in November 1999 when the original deal closed
? £400 million in senior bonds further.
Originally a £250 million subordinated bridge provided by Goldman Sachs and Donaldson, Lufkin and Jenrette was the only obvious candidate for a future dip into the bond market. But eight months on and £250 million in subordinated bonds (the first high-yield project bonds issued in Europe) along with £400 million in senior bonds ? Drax has emerged as one of the more innovative structures in the European power market this year and a real template for future business.
The complicated structuring is designed to meet the sponsor's wish for sufficient long term debt to bolster Drax's ability to succeed in the merchant power environment where long term debt is usually in short supply.
When Drax was purchased from the restructuring National Power its holding company structure won praise for its tax efficiency and the arrangers could be proud of managing to shift so much debt in a market crowded by the massive Edison Mission UK Power Lending deal.
And given Entergy's much-publicised troubles in attempting to launch the Damhead project bond, and the time-frame available for financial close on Drax, a long term senior capital markets solution was not mooted. As AES has stressed, it was an acquisition financing, albeit a complex one.
Chase Manhattan, Industrial Bank of Japan and Deutsche Bank acted as lead arrangers for the original £1.3 billion deal, but the advent of the New Electricity Trading Arrangements (NETA) and the need to match funding to the asset's life led to the tweak. Moreover, although 46% of the debt will amortize before the plant is exposed to merchant risk, getting the requisite number of satisfied and savvy investors is an uphill task.
In a sense, therefore, the move towards a bond structure was forced by circumstances and the sponsor has spent since March finalising the structure. Two global co-ordinators, Goldman Sachs and Deutsche Bank, have replaced the original triumvirate of bank debt arrangers. The latter's role extends to working with the original syndicate and resolving other issues at work in the debt's restatement. Goldman's task was more straightforward: selling the bonds on both sides of the Atlantic as quickly as possible.
Drax is hedged both financially and in terms of supply. Eastern acts as a hedge counterparty to provide a means of stabilising Drax' cashflow. This covers 60% of revenues up to 2006, and 40% of revenues to 2015. The advent of NETA means that contracts are likely to get shorter, but given AES' predilection for contracted electricity a full-blown spot-driven existence is unlikely. Nevertheless, it is the later period where the bond-holders will see their money repaid.
The trade-off is a simple one: the banks have agreed to a slight loosening on the covenants on contracts and have allowed a series of intercreditor agreements that enable the bond debt to rank pari pasu with the bank loans. In return they see their loans amortize before the bonds. And at 25 years, this tenor is much closer to the expected useful life of the station, commissioned between 1974 and 1986.
Drax is a coal-fired station and could face competition from any raft of CCGT stations that get government approval. However, it is one of only two facilities using this fuel that are fitted with flue gas desulphurisation technology. This means that AES does not have to be quite so choosy about the type of coal that it uses and can avoid any new governmental pollution controls.
Reports on the first financing noted that the coal industry was too dependent on Drax, and the government too committed to the coal industry to see the supply jeopardised. They were right. The UK government came under fire for its £100 million subsidy of RJB Mining's output. It was therefore forced to promise a relaxation of the gas-fired moratorium ? with AES one of a number of potential beneficiaries. Cheap coal is now guaranteed to 2006.
Nevertheless, finding merchant-comfortable investors meant that a little of these sterling denominated revenues would have to service dollar-denominated debt. The senior issue was split 50-50 between a $302.4 million tranche, with a 20-year tenor, and a 25-year sterling piece of £200 million, and likewise, roughly, the sub-debt, with a £135 million portion in Sterling and the remainder in dollars. The cross-border issue is covered by hedges and a reserve account, established in year 12, to avoid the problems of extreme rate fluctuations.
With the senior debt coming in with a BBB- rating, investors have to be wary if any downgrade occurs, although the bookrunners, assisted by Standard & Poor's stress that only around three plants have been downgraded for non-sovereign reasons.
The final pricing on the $200 million dollar subordinated tranche was 11.5% and 11.25% on the £135 million sterling tranche. Comment has focused on the high pricing for the sub-debt, although those close to the deal say that the coupon on the issue, comfortably inside telco spreads, was a necessary evil given the project's funding requirements.
Discussion of the Drax tax structure was a close second to market fundamentals on the list of marketing concerns. Here a chink appears in the non-recourse structure. The series of holding companies, of which at least one is based in the Cayman Islands. This structure, which is designed to eliminate any liability for withholding tax, has not been altered and the bond proceeds are dispersed amongst the structure, largely for leverage purposes. The risk exists of an adverse tax decision, estimated at up to 12bp, so AES has provided a guarantee against any downside arising from this.
Ultimately it is the sheer size of the deal that impresses. The sub-debt portion alone, at £250 million, dwarfs a number of single-asset financings, and is the first appearance of a high-yield project bond.
Originally a £250 million subordinated bridge provided by Goldman Sachs and Donaldson, Lufkin and Jenrette was the only obvious candidate for a future dip into the bond market. But eight months on and £250 million in subordinated bonds (the first high-yield project bonds issued in Europe) along with £400 million in senior bonds ? Drax has emerged as one of the more innovative structures in the European power market this year and a real template for future business.
The complicated structuring is designed to meet the sponsor's wish for sufficient long term debt to bolster Drax's ability to succeed in the merchant power environment where long term debt is usually in short supply.
When Drax was purchased from the restructuring National Power its holding company structure won praise for its tax efficiency and the arrangers could be proud of managing to shift so much debt in a market crowded by the massive Edison Mission UK Power Lending deal.
And given Entergy's much-publicised troubles in attempting to launch the Damhead project bond, and the time-frame available for financial close on Drax, a long term senior capital markets solution was not mooted. As AES has stressed, it was an acquisition financing, albeit a complex one.
Chase Manhattan, Industrial Bank of Japan and Deutsche Bank acted as lead arrangers for the original £1.3 billion deal, but the advent of the New Electricity Trading Arrangements (NETA) and the need to match funding to the asset's life led to the tweak. Moreover, although 46% of the debt will amortize before the plant is exposed to merchant risk, getting the requisite number of satisfied and savvy investors is an uphill task.
In a sense, therefore, the move towards a bond structure was forced by circumstances and the sponsor has spent since March finalising the structure. Two global co-ordinators, Goldman Sachs and Deutsche Bank, have replaced the original triumvirate of bank debt arrangers. The latter's role extends to working with the original syndicate and resolving other issues at work in the debt's restatement. Goldman's task was more straightforward: selling the bonds on both sides of the Atlantic as quickly as possible.
Drax is hedged both financially and in terms of supply. Eastern acts as a hedge counterparty to provide a means of stabilising Drax' cashflow. This covers 60% of revenues up to 2006, and 40% of revenues to 2015. The advent of NETA means that contracts are likely to get shorter, but given AES' predilection for contracted electricity a full-blown spot-driven existence is unlikely. Nevertheless, it is the later period where the bond-holders will see their money repaid.
The trade-off is a simple one: the banks have agreed to a slight loosening on the covenants on contracts and have allowed a series of intercreditor agreements that enable the bond debt to rank pari pasu with the bank loans. In return they see their loans amortize before the bonds. And at 25 years, this tenor is much closer to the expected useful life of the station, commissioned between 1974 and 1986.
Drax is a coal-fired station and could face competition from any raft of CCGT stations that get government approval. However, it is one of only two facilities using this fuel that are fitted with flue gas desulphurisation technology. This means that AES does not have to be quite so choosy about the type of coal that it uses and can avoid any new governmental pollution controls.
Reports on the first financing noted that the coal industry was too dependent on Drax, and the government too committed to the coal industry to see the supply jeopardised. They were right. The UK government came under fire for its £100 million subsidy of RJB Mining's output. It was therefore forced to promise a relaxation of the gas-fired moratorium ? with AES one of a number of potential beneficiaries. Cheap coal is now guaranteed to 2006.
Nevertheless, finding merchant-comfortable investors meant that a little of these sterling denominated revenues would have to service dollar-denominated debt. The senior issue was split 50-50 between a $302.4 million tranche, with a 20-year tenor, and a 25-year sterling piece of £200 million, and likewise, roughly, the sub-debt, with a £135 million portion in Sterling and the remainder in dollars. The cross-border issue is covered by hedges and a reserve account, established in year 12, to avoid the problems of extreme rate fluctuations.
With the senior debt coming in with a BBB- rating, investors have to be wary if any downgrade occurs, although the bookrunners, assisted by Standard & Poor's stress that only around three plants have been downgraded for non-sovereign reasons.
The final pricing on the $200 million dollar subordinated tranche was 11.5% and 11.25% on the £135 million sterling tranche. Comment has focused on the high pricing for the sub-debt, although those close to the deal say that the coupon on the issue, comfortably inside telco spreads, was a necessary evil given the project's funding requirements.
Discussion of the Drax tax structure was a close second to market fundamentals on the list of marketing concerns. Here a chink appears in the non-recourse structure. The series of holding companies, of which at least one is based in the Cayman Islands. This structure, which is designed to eliminate any liability for withholding tax, has not been altered and the bond proceeds are dispersed amongst the structure, largely for leverage purposes. The risk exists of an adverse tax decision, estimated at up to 12bp, so AES has provided a guarantee against any downside arising from this.
Ultimately it is the sheer size of the deal that impresses. The sub-debt portion alone, at £250 million, dwarfs a number of single-asset financings, and is the first appearance of a high-yield project bond.
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