Thames Water Bond Haircut Risks Contagion, Barclays Survey Says

(Bloomberg) -- The UK’s water industry may struggle to attract fresh financing should Thames Water’s senior bondholders end up facing losses, according to a survey of investors by Barclays Plc.

Protecting the investment-grade rating of Thames Water’s operating company as well as shielding haircuts for class A bonds is  a “systemic” priority for 70% of the survey’s respondents, the London-based bank said in a note Tuesday. A failure of its operating firm would prompt systemic risk for the UK’s water industry, three-quarters of participants said.

Some lenders to Thames Water face losses of as much as 40% if the utility ends up being temporarily nationalized by the UK government, according to contingency plans drawn up by officials. With £16 billion ($20 billion) of debt, it’s the most highly leveraged among peers, and its parent has already defaulted after shareholders refused to stump up the cash it needs.

“Failing to preserve Thames Water’s IG status and exposing the senior opco bondholders to material losses would lead debt investors to question the resilience and the sustainability of the UK water regulatory framework,” said Barclays analysts including Dominic Nash and Peter Crampton in the note.

The firm still needs to find billions of pounds to cover a five-year business plan required by the UK regulator to fix chronic leaks and sewage spills. That mirrors a need for funding across the sector, estimated at £45-£50 billion between 2025 and 2030, Barclays said, based on Moody’s Ratings estimates.

Barclays’s survey was based on nearly 80 responses from credit and equity institutional investors, conducted in the week to April 19.

The risks are keeping Thames Water Utilities’s debt depressed, with its £600 million of 5.125% bonds due 2037 quoted at a spread of around 280 basis points above UK gilts, according to Bloomberg indicative prices. That’s surged in the past two years and spiked to as much as 319 basis points earlier this month.

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