Thames Water’s £750mln lifeline will shore up the company’s finances short term, but huge concerns remain for the UK’s water sector, according to analysts.
Sustained high interest will mean debt payments remain more expensive for longer, marking bad news for the highly geared companies making up the sector.
According to Ofwat, Severn Trent PLC (LSE:SVT) and United Utilities Group PLC (LSE:UU.) were 59% and 65% geared respectively in spring, meaning that a high proportion of their value was made up of debt.
Pennon Group PLC (LSE:PNN, OTC:PEGRY) subsidiaries South West Water and Bristol Water were 56% and 60% geared respectively meanwhile, compared Thames Water’s 78% debt to equity ratio.
Deutsche Bank referenced Thames’ woes as a “canary in the coal mine” moment for the sector as higher debt servicing costs pushed the firm to the brink of collapse.
Ministers had been drawing up contingency plans for the collapse of Thames Water earlier this month, which could have included the re-nationalisation of London’s supplier.
Monday’s £750mln cash injection is set to keep the company afloat for the time being though, with analysts dubbing the payment as a “financial lifeline”.
Investors have effectively chosen the only option available to ensure they keep a grip on the embattled water supplier by injecting funds, Hargreaves Lansdown analyst Susannah Streeter explained, rather than running the risk of a government takeover.
However, this leaves them “staring at the huge bill for the infrastructure work needed to mend […] leaks and sewage discharges,” she continued, as public scrutiny mounts.
Tougher regulation over sewage dumping will mean companies face sharp increases in capital expenditure, Streeter added, as they are forced to improve infrastructure.
However, higher inflation could see firms pass on costs to consumers, she noted, while some have already hinted at rises as a direct result of the tougher regulation.