Macquarie Nears Deal With Southern Water’s Riskiest Creditors

(Bloomberg) -- Southern Water’s owner Macquarie and holders of the UK utility’s riskiest debt are close to a deal that would give creditors a minority stake in the water company.

The agreement would entail a partial writeoff of the around £380 million ($505 million) debt issued out of Southern Water’s holding companies in exchange for some shares as well as some cash payment, said people familiar with the matter, who spoke on the condition of anonymity. A part of the debt will be reinstated, they said. 

The deal hasn’t been finalized and its details could still change, the people said. It’s conditional on Macquarie reaching an agreement with stakeholders across the whole of Southern Water’s capital structure, they said. Debt issued at the holding company level is typically deemed less safe as it sits further away from the company’s assets and operations.

Conversations are also advanced with holders of the £400 million so-called midco debt, some of the people said. This was issued out of intermediate entities, which depend on distributions received from the operating company.

A spokesperson for Macquarie declined to comment. A representative for Southern Water didn’t immediately respond to requests for comment. 

An agreement with the creditors at the holding and intermediate levels would represent a key step forward for Southern Water, which has been looking to stabilize its finances amid pressure from ratings agencies and broader scrutiny of the UK water sector. 

The industry’s recent history of sewage spills and underinvestment in creaking infrastructure — amid a ballooning debt burden fueled by dividend payments — has triggered widespread public ire and concern about the utilities’ financial viability. 

Southern Water is now seeking to prevent another downgrade to junk, which would put it in breach of its operating license. To boost its cash coffers, shareholder Macquarie is set to inject £900 million of equity. 

On top of that, Southern Water has obtained commitments from a group of debt investors, including King Street Capital Management, for £800 million of new bonds to be issued at the operating level where most of its £6.7 billion net debt pile sits. It’s considered the safest debt, as it’s the closest to the company’s core assets and operations. 

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