A rating downgrade for around £10 billion of Thames Water debt might be the trigger for it to go into special administration, corporate bond traders have suggested.
Rating agency S&P warned last week that it was looking to downgrade the water group’s highest-rated, or supposedly safest, class of bonds, to junk status due to liquidity concerns.
That would affect more than £10 billion worth of Thames Water investment grade debt and prompt a drop to a level where UK regulator Ofwat has to intervene and take over.
To maintain its licence for London, the water utility needs to have two investment-grade ratings, although it is possible that given the size of Thames Ofwat might give it some leeway.
Thames senior bonds currently have investment grade ratings from two agencies, Moodys and S&P, albeit at the lowest status available but a downgrade would mean higher borrowing costs and potentially tip Thames into a special administration regime or temporary renationalisation.
Thames has already been refused the level of price rises it wanted by Ofwat, a decision that sparked its equity owners to pull the plug on a planned £500 million cash injection.
The scale and wider implications following a Thames collapse are other considerations for the regulator.
Speaking to the FT, one trader said Thames being classified as sub-investment grade would put big pressure on the entire junk bond market accounting as it does for 11% of the high-yield index.
Johnathan Owen, a portfolio manager at TwentyFour Asset Management, told the newspaper: “The market expects the downgrade, the downgrade can trigger the licence breach, and that may be the trigger that initiates special administration.”
With its annual results last week, Thames said it had enough cash to last eighteen months but in the draft spending determination just announced by Ofwat for the next five years, it was put into 'special measures', which sparked another sell-off in its bonds.
In the King’s Speech today, PM Keir Starmer said he recognised the need to recognises the need to improve water quality and “a bill will be introduced to strengthen the powers of the water regulator”.