Lenders in line for £1bn windfall as British Energy rebounds

Published on Sunday 16 January 2005 00:09

BRITISH Energy’s lenders could reap a profit of more than £1bn when the company re-lists on the London Stock Exchange tomorrow.

Small shareholders have been effectively wiped out by the restructuring deal which was approved by the High Court in Edinburgh on Friday.

A group of banks and hedge funds who bought British Energy’s debt after the restructuring deal was under way are also in line for a total windfall of up to 500m - representing average returns of about 300%.

The head of distressed debt at a London bank said: "I can’t think of anything offering the same kind of returns in the last five years. You could say it’s a record."

After British Energy collapsed, the creditors - including bondholders, banks and BE’s trade partners - agreed to swap the 1.2bn they were owed for 425m in bonds and 97.5% of the company’s new shares.

The package will be worth 2.23bn if the group lists at the upper end of the 280p-300p range at which British Energy New Shares were trading on the ‘grey market’ on Friday, valuing the company at 1.8bn.

Those who bought at the bonds’ deepest lows - at one point just 35p in the pound - could receive five times their investment. The biggest winners are US-based Duquesne Capital, which receives more than 14% of the newly listed company, and Deutsche Bank, which picks up 10.2%.

British Energy’s creditors have won out after a battle lasting two and a half years - first with the company’s private shareholders and then with activist hedge fund Polygon, which tried to force a rewrite to give shareholders more than 2.5% in the new company.

Malcolm Stacey, a British Energy shareholder who runs the Sharecrazy investors’ website, said last week: "They didn’t take any risks at all. British Energy could never have gone bankrupt and now 250,000 private investors are left with nothing.

"If I was a bondholder, I wouldn’t be able to sleep making money in this way."

But bondholders dismissed suggestions they were profiteering on the back of shareholders’ losses.

A distressed debt investor said: "The people who got involved in British Energy considered it a pretty extreme investment. Back when the bonds were at 35p, this was a company with almost unlimited liability and electricity prices were in a downward spiral. This thing was totally toxic."

As well as the onslaught from Polygon, bondholders have had to face doubts over whether the European Union would allow the UK government’s rescue plan, and few would have expected the outlook for the company to have rebounded so positively.

The government, which gave British Energy a loan facility of 400m, now repaid, and took on its nuclear liabilities - up to 4bn - has also benefited.

It has the right to 65% of British Energy’s cash flow, worth some 3.34bn if the equity is valued at 1.8bn, plus 275m in new British Energy debt.