(Bloomberg) -- A Thames Water bond has dropped to deeply distressed levels as investors price in the risk of a significant haircut during a debt restructuring process.
The £250 million ($324 million) second-lien note has fallen almost 20 pence on the pound since the UK’s water regulator approved only part of Thames Water’s business plan, spurring concern over how the company will cope with its debt pile. The bond fell to a record low of 37 pence on Tuesday on fears its creditors may need to accept big losses if the company’s debt pile is restructured, according to people familiar with the matter.
Not only did Ofwat limit the amount Thames Water can hike prices, it put the firm into a Turnaround Oversight Regime to fix its growing problem with sewage leaks. It also put a lower-than-expected cap on shareholders’ return on investments, which makes finding fresh equity even more challenging for the company.
As a result, some creditors fear that Thames Water won’t be able to secure the much needed equity for infrastructure upgrades without a haircut first being imposed on Thames Water’s debt pile. Luke Hickmore, investment director at Abrdn Investment Management Ltd., said the risk of losses has jumped for all bondholders, and estimates that holders of the company’s highest-ranking bonds could suffer losses of up to 20%.
Because the junior bond due 2027 is lower in the hierarchy of claims, the risk of a major haircut is high. The rest of the company’s roughly £1.36 billion Class B pile is in the form of bank loans.
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