Drax Delivers
The $3 billion Drax power station buyout from National Power ? the
UK's biggest power financing of its kind ? is breaking new levels
of deal complexity and size.
Lead arrangers Chase Manhattan, Deutsche Bank and Industrial Bank of Japan have closed the underwriting phase of the £1.3 billion ($2 billion) credit facility for InPower, a UK subsidiary of AES Corp, that bought out special purpose company National Power Drax Limited earlier in the year.
The deal signed on November 30. General syndication will be launched on Friday December 17 and the deal is expected to close in the first quarter of 2000.
Eight banks signed up as co-arrangers: Abbey National, Bank of Scotland, Bank of Tokyo-Mitsubishi, Bankgesellschaft Berlin, Fortis Bank, MeesPierson, HSBC, National Australia Bank and Rabobank.
The deal also received early commitments from 11 banks ? Bank of Montreal, Banque Nationale de Paris, Bayerische Hypo-und Vereinsbank, Bayerische Landesbank, Commerzbank, DG Bank, Dresdner Bank, ING Barings, Royal Bank of Scotland, Toronto-Dominion and Westdeutsche Landesbank ? each of which came on board as arrangers.
Among the lead banks, Chase is taking the roles of book manager, ratings advisor and modelling bank. Deutsche Bank is the loan documentation bank, technical bank and facility agent. Industrial Bank of Japan (IBJ) is the project documents and insurance bank.
IBJ, in its role as advisor to AES, appointed the lead banks.
According to all three lead arrangers the key complexity was bringing together all the parties involved.
The credit facility is structured as a 15-year amortizing term loan. Pricing is based on a grid tied to the borrower's ratings and ranges from a floor of Libor-plus 165bp to a ceiling of Libor-plus 180bp. Co-arrangers were offered an underwriting fee of 35bp for a commitment of $50 million apiece. An additional fee of 55bp will be paid upon final take.
The project benefits from fixed capacity payments from Eastern until 2007 when 46% of the senior debt will be amortized. The deal also comes with tax advantages co-arranged by Chase and Deutsche.
InPower is also planning to issue high-yield bonds early next year to take out a $250 million subordinated bridge loan provided by Goldman Sachs and Donaldson Lufkin & Jenrette, according to Michael Armstrong, group manager at UK-based AES Electric.
Proceeds from both the non-recourse credit facility and the subordinated bridge financing will be used to fund the £1.875 billion ($3 billion) acquisition of the 3960MW Drax Power station complete with flue gas desulfurization, located in North Yorkshire. Drax is the largest coal-fired plant in Europe and generates around 8% of UK electricity.
AES completed the purchase of the facility from National Power Drax Ltd, a special purpose vehicle set up by National Power PLC, in August. AES is also providing equity in the total $3 billion transaction.
Legal counsel on the deal came from Allen & Overy for the leads on the senior bank loans. Norton Rose acted for AES. Linklaters & Alliance acted for National Power and Milbank Tweed are representing the subordinated debt.
The deal was rated BBB- by Standard & Poor's on the following criteria.
Drax exposes lenders to...
? Potential for regulatory or politically driven changes to the operation of the generation market which could affect generation prices.
? Uncertainty over the new electricity trading arrangements and how they will affect Drax's competitive position.
? From 2007 revenues derived from the underlying assets are increasingly subject to merchant risk.
? Assumptions underlying the long-term forecasts of electricity prices, fuel prices, dispatch profile, and marginal costs merit order, all of which set the project economics, could be wrong.
? The operation of the flue gas desulfurization (FCD) units at Drax remains a concern, although they have a one-year operating history. The plant relies on high load factors for future revenues which could decrease if the FCD breaks down.
Strengths noted by S&P include...
? The financial hedging arrangement, with a subsidiary of an investment-grade rated counter-party, underpins a large portion of the debt service during the first seven years of the contract, thereby reducing the merchant risk. After this period the protection against merchant risk reduces, but debt service support is still significant.
? Drax has dominant position in the UK electricity market and set pool prices last year for about 17% of the time. The size of the plant enables it to achieve significant economies of scale.
? With its high efficiency rate (38%) and low marginal costs, Drax is very competitive compared with most other UK coal-fired plants.
? Low environmental risk. Drax has been retrofitted with FGD on alll of its six units. The fitting of additional low nitrogen oxide nburners would lower environmental risk further. Finance for this is included in the capital expenditure budget for the first four years.
? Financing benefits from pre-tax annual debt service coverage ratios which under the banking base case average more than 2 times, with a minimum of more than 1.6 times. The ratios can withstand substantial downside sensitivities such as an electricity price collapse.
? Lenders benefit from a cash flow sweep mechanism that supports the ultimate recovery of the senior secured facilities.
Lead arrangers Chase Manhattan, Deutsche Bank and Industrial Bank of Japan have closed the underwriting phase of the £1.3 billion ($2 billion) credit facility for InPower, a UK subsidiary of AES Corp, that bought out special purpose company National Power Drax Limited earlier in the year.
The deal signed on November 30. General syndication will be launched on Friday December 17 and the deal is expected to close in the first quarter of 2000.
Eight banks signed up as co-arrangers: Abbey National, Bank of Scotland, Bank of Tokyo-Mitsubishi, Bankgesellschaft Berlin, Fortis Bank, MeesPierson, HSBC, National Australia Bank and Rabobank.
The deal also received early commitments from 11 banks ? Bank of Montreal, Banque Nationale de Paris, Bayerische Hypo-und Vereinsbank, Bayerische Landesbank, Commerzbank, DG Bank, Dresdner Bank, ING Barings, Royal Bank of Scotland, Toronto-Dominion and Westdeutsche Landesbank ? each of which came on board as arrangers.
Among the lead banks, Chase is taking the roles of book manager, ratings advisor and modelling bank. Deutsche Bank is the loan documentation bank, technical bank and facility agent. Industrial Bank of Japan (IBJ) is the project documents and insurance bank.
IBJ, in its role as advisor to AES, appointed the lead banks.
According to all three lead arrangers the key complexity was bringing together all the parties involved.
The credit facility is structured as a 15-year amortizing term loan. Pricing is based on a grid tied to the borrower's ratings and ranges from a floor of Libor-plus 165bp to a ceiling of Libor-plus 180bp. Co-arrangers were offered an underwriting fee of 35bp for a commitment of $50 million apiece. An additional fee of 55bp will be paid upon final take.
The project benefits from fixed capacity payments from Eastern until 2007 when 46% of the senior debt will be amortized. The deal also comes with tax advantages co-arranged by Chase and Deutsche.
InPower is also planning to issue high-yield bonds early next year to take out a $250 million subordinated bridge loan provided by Goldman Sachs and Donaldson Lufkin & Jenrette, according to Michael Armstrong, group manager at UK-based AES Electric.
Proceeds from both the non-recourse credit facility and the subordinated bridge financing will be used to fund the £1.875 billion ($3 billion) acquisition of the 3960MW Drax Power station complete with flue gas desulfurization, located in North Yorkshire. Drax is the largest coal-fired plant in Europe and generates around 8% of UK electricity.
AES completed the purchase of the facility from National Power Drax Ltd, a special purpose vehicle set up by National Power PLC, in August. AES is also providing equity in the total $3 billion transaction.
Legal counsel on the deal came from Allen & Overy for the leads on the senior bank loans. Norton Rose acted for AES. Linklaters & Alliance acted for National Power and Milbank Tweed are representing the subordinated debt.
The deal was rated BBB- by Standard & Poor's on the following criteria.
Drax exposes lenders to...
? Potential for regulatory or politically driven changes to the operation of the generation market which could affect generation prices.
? Uncertainty over the new electricity trading arrangements and how they will affect Drax's competitive position.
? From 2007 revenues derived from the underlying assets are increasingly subject to merchant risk.
? Assumptions underlying the long-term forecasts of electricity prices, fuel prices, dispatch profile, and marginal costs merit order, all of which set the project economics, could be wrong.
? The operation of the flue gas desulfurization (FCD) units at Drax remains a concern, although they have a one-year operating history. The plant relies on high load factors for future revenues which could decrease if the FCD breaks down.
Strengths noted by S&P include...
? The financial hedging arrangement, with a subsidiary of an investment-grade rated counter-party, underpins a large portion of the debt service during the first seven years of the contract, thereby reducing the merchant risk. After this period the protection against merchant risk reduces, but debt service support is still significant.
? Drax has dominant position in the UK electricity market and set pool prices last year for about 17% of the time. The size of the plant enables it to achieve significant economies of scale.
? With its high efficiency rate (38%) and low marginal costs, Drax is very competitive compared with most other UK coal-fired plants.
? Low environmental risk. Drax has been retrofitted with FGD on alll of its six units. The fitting of additional low nitrogen oxide nburners would lower environmental risk further. Finance for this is included in the capital expenditure budget for the first four years.
? Financing benefits from pre-tax annual debt service coverage ratios which under the banking base case average more than 2 times, with a minimum of more than 1.6 times. The ratios can withstand substantial downside sensitivities such as an electricity price collapse.
? Lenders benefit from a cash flow sweep mechanism that supports the ultimate recovery of the senior secured facilities.
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