Water utilities across England are feeling pressure in the bond market as the crisis at Thames Water Ltd turns attention to the industry’s debt burdens.

The risk premium, or extra spread compared with government benchmarks, on two recently-issued bonds from the sector has increased since they started trading. 

The moves may signal concern among investors that Thames Water’s problems of high debt costs and ailing infrastructure will play out across the industry. Bryn Jones, head of fixed income at Rathbones Group plc, said he sold out of his holdings of UK water company bonds when Thames Water’s financial difficulties were exposed.

“Not all UK water companies are set up like Thames but there’s a huge amount of read across,” Jones said. “If the sector’s main player gets negatively impacted, then others and their spreads are going to get hit.”

Southern Water Services Finance Ltd bonds have widened 13 basis points (bps) since their March 19 pricing. Northumbrian Water Finance plc’s notes widened 4bps since pricing on March 22. That makes them underperformers among investment-grade peers whose spreads mostly narrowed in new-issue trading.

“We continue to ensure our financial resilience” after executing a turnaround plan, a spokesperson for Southern Water by email. He cited £1.5 billion of equity capital raised since 2021.

Representatives of Northumbrian Water didn’t immediately reply to a request for comment. 

The crisis at the UK’s largest water utility came to a head this month when holding company Kemble Water Finance Ltd announced it would stop making interest payments and wouldn’t repay a loan due at the the end of April. 

Thames Water was identified by regulator Ofwat in December as one of Britain’s most indebted water utilities with a gearing - a measure of debt as a proportion of its regulatory capital base - of 77.5%.  

The report cited six water providers with gearing of 70% or more: Thames, Yorkshire, Affinity, Portsmouth, South East and SES. Portsmouth reported the highest regulatory gearing at 78.4% after borrowing to develop the Havant Thicket Reservoir. Ofwat recommends a level of 55%.

“A combination of high gearing, rising cost of inflation-linked bonds and weak operating performance brought Thames Water down and could impact similarly positioned companies,” said Paul Vickars, a credit analyst at Bloomberg Intelligence. 

Yorkshire Water Finance Plc, for example, has high levels of inflation-linked debt. Its bonds are trading at a spread of 172bps compared with 168bps  at the start of the month. 

Spokespeople for Yorkshire Water didn’t immediately reply to a request for comment. 

One of the key concerns for investors is whether Thames Water’s operating company bonds will be safe from default under a new set of insolvency rules introduced this year. Recently, debt of Thames Water Utilities Finance plc thought to be insulated has declined. 

“If the authorities haircut bonds inside the ring-fenced structure of Thames Water, that’s going to create a lot of worries for even better performing water companies,” said Gordon Shannon, portfolio manager at Twenty Four Asset Management. “This would push up issuance costs and ultimately water bills across the nation.” 

  - Bloomberg