Thames Water Creditor Abrdn Sees Bond Losses of Up to 20%

Posted On 16 Jul 2024

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(Bloomberg) — One of Thames Water Ltd.’s key bondholders says a turnaround of the company envisioned by the government regulator has raised the likelihood of significant losses on its top-ranked securities.

Luke Hickmore, investment director at Abrdn Investment Management Ltd., said it will be harder for the UK’s biggest water and sewage company to attract a new buyer without imposing losses on creditors. He believes the chances of a 15%-20% loss on the Class A bonds, which make up most of Thames Water’s debt, has gone up.

The British regulator for the sector, known as Ofwat, set out a plan last week which would limit the return on investment to a level below that requested by the company. This could complicate efforts to attract new investors prepared to stump up about £2.5 billion ($3.25 billion) in equity needed to secure water supplies and stop chronic leaks and sewage spills across London and Oxfordshire, according to Hickmore.

“We think the chances of a haircut have gone up considerably,” Edinburgh-based Hickmore said. Before last week Abrdn had been “more of an opinion than not that we get par, and we think that’s the best outcome for infrastructure investment in the UK,” he said.

The challenge lies in attracting new shareholders to take over a company that has around £17 billion of debt and has a limit on how much return on equity it can make — 4.8%, as per Ofwat’s plan.

Separately, analysts at JP Morgan said in a note to clients they expect low equity investor appetite for UK water companies following these Ofwat proposals. They also warned of a “disruptive outcome” for Thames Water creditors.

Cash prices across the top-ranked Class A bonds are dropping because the market is starting to price in the possibility of a 15%-20% writedown, Hickmore said.

For example, a €1 billion bond maturing in January 2031 has fallen to under 80 cents on the euro, as of Monday morning London time, down roughly 4 cents after the draft plan, according to data compiled by Bloomberg. A £500 million February 2041 bond has dropped to around 76.5 pence, an all-time low and into what many investors consider “distressed” territory.

Abrdn is one of Thames Water’s key bondholders and is part of a creditor committee advised by Jefferies Financial Group and Akin Gump Straiss Hauer & Feld LLP.

S&P Global Ratings has put Thames Water under review for a potential downgrade to junk, which would exclude it from major indexes and restrict some investors from buying the bonds. The company’s Class A debt currently gets a BBB- grade from the ratings firm, one step above junk.

“If the real return for bondholders is 3.5%, that’s actually OK if Thames Water is investment-grade-rated,” Hickmore said. “If it is not IG and going through a restructuring process — that’s a different story.”