International Power has decided to repay $769m worth of debt associated with five power plants in the US.
The company said it was taking advantage of its strong corporate liquidity and the benefits of US tax losses to temporarily pay off the debt. It added that it wanted to refinance the assets in the near future, since they had a low level of gearing and there were a number of options available.
But analysts suggested the company should concentrate on boosting its dividend payments to turn itself into a yield play. Lakis Athanasiou at Evolution Securities said:
We have been saying since May that International Power would not be able to re-finance the American National Power debt [of $769m] and would be forced to repay, due to poor market conditions.
The current market view of International Power is an EPS momentum, growth play with 40% payout. The recent price weakness has been caused by faltering EPS expectations (significantly down in 2010 due to Czech assets sales). We believe the company is no longer a growth play, with limited opportunities in merchant markets.
We believe International Power needs to reposition itself as a yield play. It needs to boost dividend per share payout to 50% in 2010, maintaining dividend per share growth, which it can easily do, due to its strong cash flow.
We believe that the company will be drawn inexorably to the same conclusions as us (at least on payout), and have (previously) boosted our payout ratio assumption to 50%, despite current policy being 40%. We estimate that parent cash will now be £0.6bn at end 2009.
International Power has climbed 4.1p to 281p on the news.
