and therefore of losses for lenders and bondholders. The ‘Caa2’ rating on the senior debt
reflected Moody’s expectation that any realised value of the assets would not fully cover all
senior secured liabilities. It expected that recovery would be based on the unencumbered
value of the asset, the cash available in various Drax accounts and any sums that might be
paid as a consequence of TXU’s termination of the hedge contract. The ‘C’ rating on the sub-
ordinated notes reflected their deep subordination and the fact that there was almost no
prospect that noteholders would receive any amounts.
In November TXU Energy again failed to make its monthly electricity payments to Drax
on time. The two parties made additional efforts to renegotiate the hedging contract.
However, on 19 November, when they could not reach agreement, Drax demanded a £267
million termination fee within three days, plus £72 million for power supplied in October and
November. Drax’s parent, AES Corporation, indicated that it would press to have TXU
Europe wound up. On the same day, succumbing to the pressures of weak electricity prices
and a £2.9 billion debt load, TXU Europe obtained a court order to place itself and its five
subsidiaries into administration. The following day TXU Europe’s Eurobonds fell to 12 per
cent of their par value. Fitch said that TXU Europe’s financial creditors were likely to recoup
less than 50 per cent of their investment and trade creditors significantly less. TXU Europe’s
administrators, Ernst & Young and KPMG, asked the company’s trading partners to halt gas
and power deliveries, and froze electricity purchase contracts with four power stations, echo-
ing moves to wind up Enron Europe just a year before. Some observers thought that TXU
Europe could have survived and that Drax could have stood a chance to recover more if it had
not insisted on being paid ahead of other creditors, and being paid 100 pence on the pound.^10
At this point analysts from the rating agencies commented that restructuring was inevitable
for Drax. Plantagie of Standard & Poor’s commented that a restructured Drax with a lower
debt burden could be competitive.
On 28 November Drax announced that it had reached a six-month standstill agreement
with its lending banks and bondholders to give it time to restructure. It said that the lenders
and bondholders would provide fresh credit of up to £30 million, to give the plant breathing
space to adapt to operating in an open merchant market, and had agreed to the temporary or
permanent waiver of certain defaults that had occurred or could occur during the six-month
standstill period. As a result of the termination of the TXU Europe hedging contract, the
bondholders could have accelerated the bonds, but in doing so they would have forced Drax
into administration. Levesley of AES Drax said: ‘The standstill agreement ensures financial
stability and provides adequate credit support, ensuring the most effective marketing of the
plant’s output over the coming months. The prospects for the business now appear better than
they have for some time’.^11
Meanwhile AES Corporation was continuing its efforts to sell off assets and strengthen
its balance sheet. On 3 October the company had announced an offer to exchange a combi-
nation of cash and new senior secured notes for up to US$500 million of senior notes due in
2002 and 2003. The offer affected US$300 million aggregate principal amount outstanding of
8.75 per cent senior notes due in 2002 and US$200 million aggregate principal amount of
7.375 per cent remarketable and redeemable securities (ROARs) due in 2013 but puttable in
- For each US$1,000 principal amount of the 2002 notes AES offered US$500 in cash
and US$500 principal amount of a new issue of 10 per cent senior secured notes due in 2005.
For each US$1,000 principal amount of the ROARs the company offered US$1,000 princi-
pal amount of new 10 per cent senior secured notes due in 2005. Consummation of the ten-
POWER PLANT