Southern Water’s Credit Risk at Record High Amid Thames Water Woes
Southern Water’s credit risk has soared to a record high in recent days as hedge funds scramble to protect themselves against the possibility of default at the UK water company.
The curve on the utility firm’s credit default swaps is now inverted, meaning it’s more expensive for investors to buy protection against default in the short-term versus the longer-term. The one-year CDS was quoted at over 776 basis points on Monday, versus around 466 basis points for the five-year, CMAI pricing shows, shooting past the default risk pricing for its UK rivals.
Credit default swaps act as insurance contracts on debt, meaning sellers would have to pay out if Southern Water defaults on its bonds, and buyers would cash in. Pricing moves indicate interest in buying the company’s CDS has surged in recent weeks as Britain’s highly-indebted utility firms face scrutiny amid the fallout at Thames Water. The UK’s largest water provider is struggling to raise equity amid a standoff between shareholders and the regulator Ofwat.
Last week, ratings firms Moody’s Ratings and S&P Global Ratings downgraded Thames Water’s debt as they deemed a debt restructuring — and consequently a default — as likely in the coming 12 months.
Thames Water has been looking to raise £3.3 billion ($4.4 billion) in equity it needs to fix chronic leaks, sewage spills, cope with a growing population and climate change. At the same time, it is facing a potential liquidity crunch in the months ahead and has been exploring solutions to it with its existing creditors, with options ranging from the release of some cash reserves to a new credit line from some of its debt investors.
Photograph: Preparations for the laying of a new outfall pipe from at Swalecliffe wastewater treatment works, operated by Southern Water Ltd., in Whitstable, UK. Photo credit: Chris J. Ratcliffe/Bloomberg
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