British Energy bondholders’ prospects uncertain say S & P

25 September, 2002 – Bondholders in financially troubled UK nuclear electricity generator British Energy PLC face considerable uncertainty over their recovery prospects, regardless of whether the company goes into administration, according to analysis conducted by Standard & Poor’s Ratings Services.

“Even if the company does not go into administration, any financial restructure would have to consider the relative value and seniority of British Energy’s other liabilities,” said Standard & Poor’s Infrastructure Finance credit analyst Paul Lund.

Standard & Poor’s lowered the ratings on British Energy from “BB” to “B” and placed them on CreditWatch with developing implications on Sept. 17, 2002, reflecting the heightened risk of administration if attempts to restructure its finances fail or if credit support ceases after Sept. 27, 2002, when an existing credit facility from the U.K. government expires.

The two worst-case scenarios for bondholders are:
First, if British Energy were to lose its Canada-based Bruce Power LP assets owing to its inability to provide sufficient credit support to satisfy the Canadian Nuclear Safety Commission (CNSC); and
Secondly, if its U.K. nuclear power stations were to close, very high decommissioning costs would be brought forward.

“If either of these events occur, bondholders can expect no more than modest recovery on their investment,” said Lund. “If both events are avoided, then recovery prospects are likely to be high.

“In Standard & Poor’s opinion, however, closure of the power stations is unlikely in most scenarios. The key risk to bondholders, therefore, is the loss of British Energy’s North American assets, an outcome that would appear to be in nobody’s interest,” continued Lund.

In addition to the à‚£408m ($634m) bonds that mature in March 2003, March 2006, and March 2016, British Energy has a number of other liabilities that will, to some extent, influence bondholders’ recovery prospects. These include nuclear liabilities, power purchase contracts, pension liabilities, lease commitments, and other business creditors. Bondholders may, however, have to consider restructuring the bonds to improve their chances of recovery.

British Energy’s most valuable assets are its North American holdings–Bruce Power and Amergen Energy LLC–which, if their full value is realized, should go a long way toward redeeming bondholders. The bondholders’ main competition will be creditors under power purchase contracts.

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