sidered restructuring more likely because that was what the bank lenders, which held 70 per
cent of the outstanding senior debt, generally preferred. Given Drax’s liquidity at the time,
Plantagie considered a payment default on the borrower’s senior debt unlikely before June
2003, although a ratings default (to ‘D’) was a possibility. Even if Drax signed a new ener-
gy sales contract, the price would have to be significantly above current market prices to
enable Drax to service its senior debt. As noted above, a payment from TXU Energy for
contract termination would go entirely to senior lenders. However, if Drax were sold, bank
lenders and senior bond lenders would share the proceeds. Plantagie also noted that the
senior debt agreements provided for a cash sweep that would take all the money in the liq-
uidity accounts, and prepay senior debt after two consecutive failures of a one-year-historic
and a two-year and five-year forward-looking distribution test, and a 1.2 times debt-service
coverage ratio.
Plantagie explained that subordinated note holders would have very limited ability to
affect the senior debt. Once senior debt was accelerated, the subordinated debt could be accel-
erated as well. However, as noted above, acceleration of the senior debt appeared unlikely. A
payment default on the subordinated notes in February 2003 seemed more likely. That would
lead to a 90-day standstill period in which senior and subordinated lenders would try to find
a solution before subordinated note holders could enforce their security. Those note holders
could enforce a mortgage that they had on all of the shares of AES Drax Energy, thereby
reducing AES’s ownership of Drax. However, the value of shares in a distressed asset under
control of senior lenders was questionable, leaving the subordinated note holders with only a
claim on potential dividends after debt service. Payment of such dividends would be unlike-
ly until a significant portion of senior debt was retired and wholesale power prices recovered.
Thus prospects were very bleak for subordinated note holders.
On 4 November TXU Energy notified Drax that, following Drax’s failure to post a £50
million letter of credit, TXU Energy intended to terminate its hedge contract on 3 February
- The contract required the company to provide 90 days notice. TXU Energy and TXU
Europe had been struggling to survive since the US parent had pulled financial support in
October. On 6 November TXU Europe announced that it was putting its remaining German
energy assets up for sale. The company was reportedly negotiating to sell its Nordic interests
as well. During the same week Innogy filed a petition with the London High Court to put
TXU Europe into administration. TXU Europe was overdue on paying Innogy approximate-
ly £15 million. Innogy, now owned by RWE of Germany, was formerly National Power, the
company that had sold Drax to AES for £1.9 billion (US$3 billion) in 1999. Some industry
insiders speculated that Innogy’s motivation for trying to force TXU Europe into administra-
tion was in turn to force the shutdown of the Drax plant, which it then would be able to buy
cheaply from the administrator.
Following TXU Energy’s notice of termination Moody’s downgraded Drax’s senior
secured bonds and bank debt from ‘Caa1’ to ‘Caa2’, and its subordinated notes from ‘Ca’ to
‘C’. In a press release the agency said that it believed that there was sufficient cash available
in Drax accounts to make the interest and principal payments due on the senior debt at the
end of December, but that there was virtually no chance of cash being available for the inter-
est payment on the subordinated notes due in February 2003. In Moody’s opinion, in the
absence of the hedge contract and taking into account the current conditions of the UK elec-
tricity market, Drax would not be able to service its senior secured debt on an ongoing basis.
All of the agency’s ratings reflected its view that there was a very high probability of default,
DRAX, UNITED KINGDOM