Turmoil at Thames Water has triggered a wider sell-off in bonds across the utility industry as investors turn their attention to debt burdens at rivals.
The difference between yields on benchmark government bonds and those issued by Southern Water and Northumbrian Water have widened in recent weeks, reflecting growing nervousness about how risky the debt is.
The so-called “risk premium” on Southern Water Services bonds has widened by 13 basis points since March 19, while Northumbrian Water Finance’s bonds widened four basis points since March 22.
The moves means the companies are lagging behind investment-grade rivals and may signal concern among investors that Thames Water’s problems could spread across the industry.
Bryn Jones at Rathbones Group, told Bloomberg: “Not all UK water companies are set up like Thames but there’s a huge amount of read across.
“If the sector’s main player gets negatively impacted, then others and their spreads are going to get hit.”
A spokesman for Southern Water, which serves almost 5 million people across Kent, Sussex, Hampshire and the Isle of Wight, said: “With a supportive shareholder which has injected more than £1.5bn of fresh equity into the group since 2021, we have a resilient financial position. Our two bond issues in recent months have raised £1bn, and were both over-subscribed – indicating a high degree of confidence among our institutional investors.”
Northumbrian Water, which serves more than 2 million people in Northumberland, Tyne and Wear, Durham and parts of North Yorkshire, was also contacted for comment.
Thames Water is veering closer to potential nationalisation after parent company Kemble defaulted on a £400m loan last week.
The company is also due to repay £190m to its lenders by the end of this month, but it has warned this deadline will be missed after shareholders refused to pump in more money.
The crisis has fuelled fears that the struggling utility could collapse into administration. The Telegraph has revealed that bosses are exploring a radical break-up plan as they look to navigate the cash crunch.
The value of Kemble bonds has dropped sharply in recent weeks as ratings agencies Fitch and S&P cut the company’s debt further into junk territory.
Thames Water is struggling under the weight of an £18bn debt pile, much of which was racked up under its previous owners Macquarie Group.
In December, regulator Ofwat identified Thames Water as one of the UK’s most indebted water companies. Its gearing ratio, which measures debt as a proportion of a company’s regulatory capital value, stood at just under 78pc.
Five other water companies – Yorkshire, Affinity, Portsmouth, South East and SES – were singled out for having a gearing ratio of above 70pc. Ofwat’s recommended level is just 55pc.
Thames Water, which is being advised by turnaround specialists at Alvarez & Marsal, has asked lenders not to take creditor action as it tries to shore up its future.
Two Chinese banks – the Bank of China and the Industrial and Commercial Bank of China – are among a group of lenders that are likely to ultimately decide Thames Water’s fate.
Dutch bank ING and Allied Irish Bank are also part of the creditor group, alongside Macquarie.
The Australian investment giant, which has been criticised for building up Thames Water’s debt pile during its ownership, provided around £130m in loans to Kemble between 2018 and 2020, the Times reported.
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