der offer was subject to a number of conditions, including tenders representing 75 per cent of
the 2002 notes and the ROARs on a combined basis, and AES’s concurrent entry into a new
multitranche senior secured credit facility that would rank pari passuwith the new senior
secured notes. The proposed bank facility would replace an US$850 million revolving cred-
it due in March 2003; a US$425 million term loan due in August 2003; a US$262.5 million
term loan EDC Funding II LLC, an AES subsidiary, due in 2003; and a £52.3 million letter
of credit facility.
Upon review of the new secured refinancing, Standard & Poor’s downgraded AES’s
senior implied rating from ‘Ba3’ to ‘B2’, its senior unsecured rating from ‘Ba3’ to ‘B3’, its
senior subordinated rating from ‘B2’ to ‘Caa1’, its junior subordinated rating from ‘B2’ to
‘Caa2’ and its preferred stock rating from ‘Caa1’ to ‘Ca’.
Moody’s assigned a ‘B2’ rating to AES’s proposed US$1.6 billion senior secured bank
credit facility and to its proposed US$500 million senior secured bond offering. The outlook
for these ratings was negative. Moody’s noted that AES’s credit fundamentals had deterio-
rated because of difficult wholesale power markets in Argentina, Brazil, Venezuela, the
United States and the United Kingdom. The agency’s rating actions reflected weak cash flow
relative to a high debt burden and diminishing financial flexibility. The negative outlook
reflected the possibility of further rating downgrades if AES proved to be unable to do any of
the following:
- maintaining its expected dividend stream from subsidiaries and investments;
- executing the sale of Cilcorp in the first quarter of 2003;
- completing additional asset sales on a timely basis;
- maintaining capital spending at more sustainable levels consistent with a debt reduction
strategy; and - refinancing bank credit facilities and near-term bond maturities.
Moody’s said that AES’s success in restructuring would be determined primarily by its suc-
cess in executing asset sales sooner rather than later. In addition to Cilcorp, AES had com-
mitted itself to selling as much as US$1 billion worth of additional assets. The agency said
that the rating on the prospective senior secured bonds and bank credit facilities was assigned
at the senior implied level because the collateral was primarily stock in subsidiaries, rather
than a claim on underlying physical assets. The new bond and bank debt at the holding com-
pany level would be structurally subordinated to a large amount of debt at the subsidiary
level, such as that of Drax.
Lessons learned
Three principal lessons can be drawn from the story of Drax. First, the effect of the introduc-
tion of NETA was underestimated. Second, Drax’s leverage was too high to withstand the
deterioration in wholesale electricity prices and the related upheaval in the UK electricity
market. Third, as a high-growth, high-leverage company, AES was vulnerable to the combi-
nation of a worldwide drop in wholesale electricity prices, economic collapse in Latin
America and ripple effects from the bankruptcy of Enron.
DRAX, UNITED KINGDOM