Losses deepened for listed water companies Pennon Group PLC (LSE:PNN, OTC:PEGRY), Severn Trent PLC (LSE:SVT) and United Utilities Group PLC (LSE:UU.) as the day went on as talks about nationalisation grew louder amid the fear that Thames Water could collapse.
Severn Trent shares dropped 3.2%, Pennon fell 3.1% and United Utilities 1.5%.
Emergency talks on Thames Water's future are continuing, with a buyer sought and the government having promised yesterday that it would temporarily nationalise the debt-laden firm if it does collapse, in a similar fashion to the Bulb rescue last year.
Finding a buyer is likely to be much tougher, analysts said, as Thames Water's 15mln customers are ten times Bulb's numbers, though government minister Neil O'Brien reassured customers that over their bills and water supply.
The liquidity crisis at Thames Water, where regulator Ofwat said it has "significant issues to address", has sparked wider concerns rise about the longer-term debt burdens in the sector given the £100bn of environmental improvement needed.
Focus on wider sector
Focus now on other water companies flagged by Ofwat due to concerns over "financial resilience".
The issues at Thames Water "might raise broader questions", analysts at Jefferies said, also noting reports of growing public sentiment that the UK water company ownership model needs to change due to sector performance on sewage pollution and water health.
"In our view, the read-across here to the listed water names is not significant due to them having greater capitalisation," they added, pointing out that Thames Water had the highest regulatory gearing of circa 80%, compared to low-60% for Severn Trent, UU and Pennon.
However, they acknowledged that the newsflow is "likely to raise broader questions about past regulatory robustness, financing and ownership structures for the sector", with Ofwat recently making changes that highlight ongoing scrutiny on financing and dividends in the sector.
"When combined with the growing need to balance environmental capex and affordability, it makes for a heightened regulatory environment, which we feel justifies our argument that water companies should trade at valuations close to nil premium," they said.
At Barclays, the feeling was that the “sector stress may lead to failures of weaker players but stronger water players should benefit”.
"Big questions" are now being raised about the potential precariousness of other water firms, said analyst Susannah Streeter at Hargreaves Lansdown, with Ofwat also monitoring Southern Water and Yorkshire Water and having previously flagged worries about Northumbrian Water and Portsmouth Water for having fallen far short of expectations when it came to the level of dividends paid given their relative financial resilience.
"It’s no wonder waves of worry are now surrounding more firms who have been caught uptide, as the era of cheap money has been dammed and their debt payments have hurtled upwards," she said.
Mountain of investment
Having largely shrugging off the crisis talks surrounding Thames Water yesterday, investors were today reassessing the longer-term implications for other firms in the sector due to such abovementioned issues being raised.
Although the immediate financial situation for Severn Trent, Pennon and UU is considered to be more stable compared to other companies, "the scale of the mountain to climb in terms of the investment needed is sparking fresh concerns", Streeter said.
She added: "Arguably, publicly listed companies have fewer shadows to hide in when it comes to transparency about dividend payments than firms with more complicated investment structures. However, as the next regulatory timeframe looms for the period 2025 to 2030, there is set to be much bigger demands from regulators on infrastructure improvements to reduce sewage spills, increase capacity, and meet net zero targets."
Capital expenditure will have to increase sharply as a result, she noted, while the listed trio have already had to push up spending, budgets will need to expand further and debt levels will rise as a result - even though the sector is calling for bills to rise up to 40% to pay for pollution improvements.
Difficult to find a Thames buyer
Analysts said finding a buyer for Thames Water will not be easy and there is no quick resolution apparent, partly due to its size.
"It’s likely to prove more difficult to find a buyer, particularly given its £14bn debt load. The big question is whether the company’s investors, including overseas pension and sovereign wealth funds, will be willing to stump up a promised financial lifeline of £1bn," said Streeter.
A special administration for Thames Water could lead to its debts needing to be slashed if the government takes control of the company and wants to find a buyer, according to analysts at Bloomberg Intelligence.
The credit analysts said that finding a new owner may require a haircut of up to 25% on the nominal value of its £14bn of ring-fenced debt in order to reduce it to the levels normally required by Ofwat.
"A special administration regime would facilitate a transfer to new owners but leave ring-fenced bondholders unable to enforce any security and with no guarantee of being made whole in a new financial structure," they said.
Pouring more money into the "financial black hole" that Thames Water appears to have dug is "clearly an unwelcome prospect, with little hope of future returns given the huge infrastructure work needed to mend leaks and sewage discharges," said Streeter.