Southern Water raises £300m of premium-priced debt

Southern Water raised £300m of discounted debt with a 7.75% coupon on 31 October. The seven year bonds were oversubscribed, but Southern had offered discounts to the face value of the £100m and £200m bonds, pushing up the effective yields by 148 and 224 basis points respectively.

At these levels, it is hard to see how Southern Water will be able to finance itself in line with the industry allowed cost of debt, which is currently 3.66% plus CPIH inflation – a point not lost on Moody’s and S&P. Southern Water has already seen its credit ratings cut to low investment grade. There is the risk of a further downgrade – to junk status – by both Moody’s and S&P if Southern’s PR24 Final Determination is punitive. Ofwat will be considering the price of water company debt issuance in the final year of AMP7 as it sets an allowed return for PR24.

Southern Water's debt issuance, and the groups competing to lend Thames emergency funding, shows the continuing attractiveness of UK water – but only if debt is raised at a premium price. In fact, it seems that UK water is becoming attractive to high yield debt investors, including hedge funds, looking for premium pricing on both new debt issuance and refinancing, for financially and operationally challenged companies.

More worrying for Southern Water’s capital providers is that, unlike Thames, the company has been unable to lift itself out of the ‘lagging behind’ category in Ofwat’s latest performance report. This is despite the “significant progress” the company claims it is making with its Turnaround Plan. Raising finance is only one element of Southern Water’s many challenges.