ing. When the management of AES negotiated the agreement, it was aware that TXU would
have liked to own Drax, but was subject to regulatory constraints because it already had a large
share of the power generation market. Both parties might have considered raising the percent-
age of output covered by the agreement, but they feared that if the percentage were too high the
agreement would appear to the regulators to be a de factopurchase of the plant by TXU.
The resulting hedging contract strengthened the credit of the project by providing on the
one hand a steady revenue stream, while, on the other hand, leaving a substantial amount of
forecast revenues subject to merchant risk. AES was confident about its ability to trade and
manage this risk, but merchant risk would be an important issue for many of the banks that
considered participating in the loan. Given the risks and the size of the deal, the bank under-
writers sought a credit rating for the loan and worked with AES to make sure that the rating
would be investment grade.
Bond financing
In July 2000 AES Drax Holdings Ltd issued £400 million equivalent senior secured bonds
due in 2020 and 2025 to repay part of the £1.3 billion bank financing for InPower Ltd. At the
same time AES Drax Energy Ltd issued £250 million equivalent high-yield, deeply subordi-
nated notes to refinance a bridge loan of a similar amount made to AES at the time of the
plant purchase. InPower Ltd is a special-purpose vehicle, while AES Drax Holdings Ltd and
AES Drax Energy Ltd are indirect subsidiaries of AES Corporation. Exhibit 12.2 shows the
structure established by AES in connection with the acquisition of the Drax power station and
refinancing of the project.
The subordinated debt is serviced by dividend distributions after operating expenses,
senior debt service and full funding of required reserve accounts. The distributions are sub-
ject to various tests and come before distributions to the parent company, which are subject
to a 1.5 times semi-annual debt-service-coverage-ratio test on both a one-year-historic and a
two-year forward-looking basis.
The high-yield debt increased the aver-
age life of Drax’s entire debt financing from
about 11 years to 17 years and provided an
uplift to the sponsors’ returns. However, it
potentially increased the risk of the senior
debt and could not have been issued without
agreement by the senior lenders to weaken
their protections against junior debt. The
senior lenders were particularly concerned
that the high-yield debt be deeply subordinat-
ed, so as not to jeopardise the investment-
grade credit rating on the senior debt.
Sources and uses of funds
The capitalisation of the project after the
bond financing is reflected in the sources and
uses of funds (see Exhibit 12.3).
DRAX, UNITED KINGDOMExhibit 12.3
Sources and uses of fundsAmount Proportion
Sources (£ millions) (%)
Senior secured bank loan 905 46
Senior secured bonds 400 20
Equity 413 21
Subordinated debt 250 13
Total 1,968 100
Amount Proportion
Uses (£ millions) (%)
Shares of AES Drax Ltd 1,807 92
Fuel stock 45 2
Intellectual property license 11 1
Acquisition costs 105 5
Total 1,968 100