Drax Under Scrutiny From Short Sellers Over Debt Structure

Shares in Drax Group Plc are under pressure after several investors disclosed they were betting against the UK energy company.

(Bloomberg) — Shares in Drax Group Plc are under pressure after several investors disclosed they were betting against the UK energy company.

Short-seller Shadowfall Capital & Research LLC, whose managing partner, Matt Earl, made a lucrative early bet against German payments company Wirecard AG, disclosed a short position in Drax now worth about £9.4 million ($11.5 million) earlier this month. Hedge funds Marshall Wace LLP and GLG Partners LP have disclosed even larger short bets.

Drax fell as much as 4.7% on Tuesday to the lowest for more than two years after questions surfaced about its debt structure. Earl said in a statement that the company is significantly more leveraged than most investors calculated.

“We take a disciplined approach to managing our balance sheet, which includes debt and working capital facilities which are all long-standing facilities and clearly disclosed,” Drax said in an emailed statement. 

Citigroup Inc. cut their price target for the company by 25% on Monday after finding £653 million of liabilities on the company’s balance sheet that weren’t included in net debt, according to analysts Jenny Ping and Rory Graham-Watson. Citi said it had been asked by a number of investors to look at Drax’s balance sheet arrangements.

Marshall Wace and GLG Partners declined to comment.

Shadowfall’s Earl also said he’s expecting increasing scrutiny of Drax’s green credentials will make it harder for the company to justify its significant government subsidies, high dividend payments and share buyback program.

Government subsidies for Drax’s unabated biomass power generation expire in 2027. Due to the cost of the fuel, generation is unlikely to be profitable without support. Drax is in discussions with the UK government about “bridging options” to help finance out to as far as 2030.

Drax was also the subject of an investigation by Bloomberg News, which showed how the company’s use of its existing subsidy program allowed it to avoid providing more than £600 million to ease consumer bills. It also completed a £150 million share buyback plan in September.

Drax is classed as a low-carbon investment because it uses biomass from commercial forests but the fuel remains under scrutiny. Energy regulator Ofgem is investigating the company over its sustainability reporting. On top of that, the UK’s National Audit Office announced this month that it’s reviewing the government’s policy on biomass. 

Drax said its biomass is sourced sustainably and it has a “clear capital allocation policy that supports investment in our business and returns to shareholders.”

–With assistance from Priscila Azevedo Rocha, Lucca de Paoli, Nishant Kumar, Libby Cherry and Joe Easton.

(Adds share price drop in third paragraph)

More stories like this are available on bloomberg.com

©2023 Bloomberg L.P.