2005 - 2006 - Pinsent Masons Water Yearbook 2012

UNITED KINGDOM PART 2: COUNTRY ANALYSIS
AWG raised £400 million from the capital markets in April this year through a repackaged bond at a
coupon 0.125% lower than the original floating rate bond, reducing interest costs by £0.5 million per
annum. The original bond, issued by Anglian Water Services Financing was sold on to Freshwater
Finance, a special purpose vehicle. By selling the debt on, AWG was able to hedge its debt for
interest rate exposure.
In 2004, Wessex and Northumbrian repackaged a total of £325 million in existing debt as a monoline
or wrapped issuance, allowing debt to be granted an AAA (the highest possible) rating through placing
guarantees on assets and cash flow backing that portion of the company’s overall debt. In this case,
Lunar Funding Limited issued £325 million in 5.75% Senior Bonds.
According to Standards and Poor’s, water company debt has been responsible for 30% of European
securitised bond activity since 1998, demonstrating how well the sector is suited to this form of
packaging. This market has become increasingly important in England & Wales having been
pioneered in the UK by Glas Cymru in 2001. AAA rated wrapped issuances would have typically
gained a BBB to AA rating and therefore cost between 0.75% (AA) and 1.50% (BBB) more, or £7.5-
15.0 million per annum in interest savings per £1.0 billion of corporate debt. Southern Water’s
Artesian Finance issue is another important example of this type of deal.
The monoline insurers in structured finance are the leading creditors, as they have first call in terms of
the covenants and trigger ratios providing mechanisms that stop money from being paid out from the
appointed business if it got into financial difficulties. Interestingly, it has also become clears that lowly
rated corporate debt (that left over from the structured rating process) is also of a high quality, as the
improved financial performance of a company means that it is appreciably less risky than the markets
have realised. This has resulted in further refinancings by Glas Cymru over the past two years, so that
all of its corporate debt now has pretty low interest rates.
New Markets [3] Private equity
Of the eight market listed Statutory Water Companies, four have changed hands since 2003 and one
further bid is subject to a Competition Commission investigation. The number of listed SWCs will fall
from six (seven if South East Water is included, as it was a part of a listed entity) to two, as they are
taken up by private equity vehicles. While Ofwat has expressed some regret about the loss of market
listed companies, in the case of Mid Kent, it is a sale from one private equity fund to another.
The remaining SWCs
Bournemouth & West Hants Biwater (UK)/Nuon (Netherlands)
Bristol Water LSE Listed
Dee Valley LSE Listed
Sutton & East Surrey LSE Listed (Terra Firma bid)
Portsmouth Water South Downs (UK, Private)
South East Water Macquarie (Australia)
South Staffordshire First Islamic Bank (Bahrain)
Mid Kent Water Westpac/Utilities Trust (Australia)
This points to an emphasis on secondary markets in these companies, as the private equity funds
seek to sell holdings on either to realise gains or cut their losses as the case may be.
210 Pinsent Masons Water Yearbook 2005 – 2006