LARGEST INVESTOR IS CANADA'S OMERS PENSION FUND
Tasos Vossos
Fri, July 14, 2023
(Bloomberg) -- The crisis at Thames Water Ltd. has left the $60 billion market for UK water utility bonds deeply divided.
A measure of the dispersion in spreads in the sector has surged over the past few weeks as investors try to separate companies they see as well run, with manageable debt loads, from those that face the most operational and balance sheet issues. The standard deviation almost tripled after reports of a possible temporary nationalization of Thames Water, before settling at around double typical levels, according to data compiled by Bloomberg.
“Going forward we should see more differentiation in spread terms among various water companies, driven by an increasing focus on operational performance, gearing and amount of inflation linked debt,” said Kshitij Sinha, a portfolio manager at Canada Life Asset Management.
Bonds issued by Southern Water Ltd. and the holding company of Anglian Water — along with Thames Water’s Kemble bonds — saw the biggest spread widening over the past few weeks. Debt issued by Severn Trent Plc had one of the mildest reactions, with only a single-digit increase in the risk premium.
Representatives at Thames Water and Anglian Water didn’t respond to requests for comment. A representative at Severn Trent said they had no comment to add, while a spokesperson for Southern Water also declined to comment on bond spreads.
Thames Water has been engulfed in a crisis as it’s had to borrow more to fund investments in its ailing infrastructure, while soaring inflation in the UK has driven up the cost of servicing its £8 billion ($10.5 billion) of index-linked debt. The company — which serves about a quarter of the UK population — said this week that it is confident of raising further funds after investors agreed to a £750 million equity injection, but UK regulator Ofwat said that there are still “significant issues” to deal with.
And in a sign of industry issues going beyond Thames Water, Southern Water was downgraded by Fitch Ratings last week, triggering clauses in bond documents that forced it to suspend dividend payments.
To be sure, avoiding losses in water company bonds since Thames Water made the headlines in late June would have been difficult, with spreads on the vast majority of issuers widening, based on data compiled by Bloomberg.
Still, the dispersion indicates that investors are starting to pick which companies they see as winners and losers in the group.
“Investors are not going to abandon the sector: these companies are still high-quality, offering attractive returns,” said Canada Life’s Sinha. “However, spreads will start reflecting the risk in the sector, penalizing the constant underperformers.”
Most Read from Bloomberg Businessweek
Tasos Vossos
Fri, July 14, 2023
(Bloomberg) -- The crisis at Thames Water Ltd. has left the $60 billion market for UK water utility bonds deeply divided.
A measure of the dispersion in spreads in the sector has surged over the past few weeks as investors try to separate companies they see as well run, with manageable debt loads, from those that face the most operational and balance sheet issues. The standard deviation almost tripled after reports of a possible temporary nationalization of Thames Water, before settling at around double typical levels, according to data compiled by Bloomberg.
“Going forward we should see more differentiation in spread terms among various water companies, driven by an increasing focus on operational performance, gearing and amount of inflation linked debt,” said Kshitij Sinha, a portfolio manager at Canada Life Asset Management.
Bonds issued by Southern Water Ltd. and the holding company of Anglian Water — along with Thames Water’s Kemble bonds — saw the biggest spread widening over the past few weeks. Debt issued by Severn Trent Plc had one of the mildest reactions, with only a single-digit increase in the risk premium.
Representatives at Thames Water and Anglian Water didn’t respond to requests for comment. A representative at Severn Trent said they had no comment to add, while a spokesperson for Southern Water also declined to comment on bond spreads.
Thames Water has been engulfed in a crisis as it’s had to borrow more to fund investments in its ailing infrastructure, while soaring inflation in the UK has driven up the cost of servicing its £8 billion ($10.5 billion) of index-linked debt. The company — which serves about a quarter of the UK population — said this week that it is confident of raising further funds after investors agreed to a £750 million equity injection, but UK regulator Ofwat said that there are still “significant issues” to deal with.
And in a sign of industry issues going beyond Thames Water, Southern Water was downgraded by Fitch Ratings last week, triggering clauses in bond documents that forced it to suspend dividend payments.
To be sure, avoiding losses in water company bonds since Thames Water made the headlines in late June would have been difficult, with spreads on the vast majority of issuers widening, based on data compiled by Bloomberg.
Still, the dispersion indicates that investors are starting to pick which companies they see as winners and losers in the group.
“Investors are not going to abandon the sector: these companies are still high-quality, offering attractive returns,” said Canada Life’s Sinha. “However, spreads will start reflecting the risk in the sector, penalizing the constant underperformers.”
Most Read from Bloomberg Businessweek
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