(Bloomberg) -- The growing possibility of a state rescue at Thames Water is weighing on debt that was previously considered to be insulated from the utility company’s woes.
Bonds of Thames Water’s parent entity, Kemble Water Finance Limited, which has said it won’t be able to repay a loan due later this month, have long traded at dramatic discounts to face value. But debt issued by the operating company, Thames Water Utilities Finance Plc, has remained relatively resilient.
Now, as investors start to factor in a higher possibility of losses on the more senior — and much larger part — of the beleaguered utility’s capital structure, the debt issued by the regulated entity is also trading lower.
“Special administration is not imminent in our view, but does remain a tail risk,” analysts at JPMorgan Chase & Co said in a note published earlier this week. In such a process — effectively a type of temporary nationalization — holders of Thames Water debt could face haircuts to the principal value of their securities, the note said.
Fitch Ratings believes that a default at Kemble is now probable, according to a note published on Thursday. But while Kemble is the parent company for the firm, tight legal and regulatory frameworks mean Thames Water should be able to operate on its own.
Kemble, on the other hand, needs dividends from Thames Water to finance its debt, and those payments are in a so-called cash lock, which kicks in once a company’s credit rating goes to or below Baa3/BBB-, if either of these ratings is on negative outlook.
Special administration at Thames Water remains a distant possibility, as the company had around £2.4 billion of cash and liquidity facilities available at the end of February that should see it through well into next year. Still, if it did happen, creditors could be looking at a hit of around 15% to 25% of the face value of their debts, according to JPMorgan.
As bond prices drop, the players involved in the group’s capital structure might change; opportunistic funds are starting to take a look at the Thames Water operating company bonds and are searching for a potential entry point, according to investors who spoke to Bloomberg on the condition of anonymity.
--With assistance from Henry Ren.
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