IEEFA: American vulture funds prepare to feast on Australia’s Bluewaters Coal Power Station

Elliott Management Corporation, the infamous U.S. based vulture fund manager, has hired law firm Corrs Chambers Westgarth “to control the destiny of the Bluewaters Power Station”. Advisory and investment firm KordaMentha has also been reportedly retained by other debtholders to restructure the troubled company. 

The 466 megawatt (MW) Bluewaters Power Station is jointly owned by Japanese groups Sumitomo Corporation and Kansai Electric and was originally acquired in 2013 for A$1.1bn, with a reported A$922m of total debt financing involved, with senior and mezzanine debt. 

EARLIER LAST MONTH ELLIOTT MANAGEMENT, AMONGST OTHER DISTRESSED INVESTORS SWOOPED IN at the eleventh hour, purchasing debt in the overleveraged, financially distressed Bluewaters Power at between 70 cents and 75 cents in the dollar. The debt was auctioned in a fire sale by original lenders (including Australian banks ANZ, Westpac, NAB) who divested their holdings at a loss, no longer wanting to be associated with investments in loss-making thermal coal-fired power plants.

While the media had speculated that Elliott and other debt investors would look to return Bluewaters to profit in a corporate turnaround, Bluewaters’ ongoing battle with coal supply (sourced from long-insolvent Griffin Coal mine near Collie south of Perth), record low prices and weak electricity demand suggest this theory is unlikely. 

Considering the track record of the vulture funds involved, we speculate it is more likely that legal representation was retained by Elliott to sue the owners of Bluewaters for the full-face value of Bluewaters’ debt (vs the 70 cents in the dollar they paid). This debt litigation strategy was famously profitable for Elliott Management during the Argentinian debt crisis, the worst economic crisis in the country’s history which saw millions of people dumped into poverty but netted Elliott a cool US$2bn. 

IT IS UNDERSTOOD THE FACE VALUE OF THE BONDS OWED TO BLUEWATERS’ DEBTHOLDERS IS A$384M, however the maturity date of the debt is publicly unknown. 

More imminently, the viability of Bluewaters may depend on the outcome of a Western Australian Supreme Court hearing held on 28 August 2020 relating to ongoing disruptions in its coal supply provided by Griffin Coal. 

In the court filings, Bluewaters claimed that Griffin had defaulted on its coal supply agreements. 

Due to step-in provisions, Bluewaters may be able to gain control of the Griffin coal mine to supply the coal it needs to power ~15% of Western Australia’s electricity. 

GRIFFIN HAS BLED CASH SINCE IT WAS ACQUIRED IN 2010 BY (THE FINANCIALLY DISTRESSED) LANCO INFRATECH OF INDIA. In its latest disclosed financial statements (March 2018), Griffin Coal reported an annual loss of A$230m and its current liabilities exceed current assets by $485m.

Amidst record low coal prices and the market pivot towards ever-lower cost renewables, the ongoing commercial viability of the Griffin coal mine (and ultimately Bluewaters power plant) is highly uncertain. 

If Bluewaters secures control of the embattled miner following the Supreme Court decision it may be able to temporarily shore up coal supply, but it may also push the power station into a deeper debt hole; an undesirable position for Elliott and Bluewaters’ other debt holders.

One thing can be certain about Elliott and the other foreign distressed debt investors. They knowingly entered this situation with the sole aim of extracting a profit as their only concern.

Litigation to recover the full-face value of the debt investment appears to be the easiest path to profit, for them. 

Litigation may not be their intention, however. It is possible they are interested in gaining control to drive a corporate turnaround of a newly combined, deleveraged Bluewaters and Griffin integrated coal power. 

Either way, any profit for vultures is predicated on losses to other stakeholders.

THE LOSERS IN THIS CASE ARE THE SMALL TOWN EMPLOYEES WHO RELY ON INCOME FROM BLUEWATERS/GRIFFIN COAL (the coal miners have already seen repeated staffing cuts and a massive 35% pay cut in recent years). 

Other losers are the people of Western Australia (who most likely will suffer the burden of resulting higher energy prices and grid disruption) and the Australian banks who have already divested their debt at a 25-30% capital loss.

While vultures try to feast on the carcass of Griffin Coal and Bluewaters, there are some wider lessons that should be learned. 

Western Australia’s newly unveiled Energy Transformation Strategy aspires to exit thermal coal by 2035. Under the plan, these last aging coal-fired power stations need to be systematically closed out, vulnerable to distressed investors and the whims of foreign vultures. 

It is not sufficient to simply aspire to exit the coal industry.

To protect Australian communities, customers and Australian companies, Bluewaters highlights the need for the Western Australian government to step up and outline a formal transition plan out of coal.

Trista Rose is a Research Analyst, Global Bonds and a guest contributor with IEEFA.