(Bloomberg) -- British water utility Severn Trent Plc has pulled in strong demand for a pound bond sale in a boost for the beleaguered UK water sector.
The utility has pulled in bids of £1.6 billion ($2.1 billion), more than 4.5 times the size of the £350 million offering of 14-year sustainability notes, according to a person with knowledge of the sale, who asked not to be identified. The deal is set to price later on Wednesday.
It’s a boon for the UK water sector, which has come under pressure from regulator Ofwat to clean up the country’s rivers and seas and make much-needed infrastructure upgrades. The top-ranked bonds of the UK’s largest water company, Thames Water, were today cut to junk at Moody’s Ratings, sending its bonds well into distressed territory at below 70 cents.
Severn Trent will price its 14-year notes at 155 basis points above UK Treasuries, well inside an initial pricing target of between 170 and 175 basis points. The final spread suggests the new bonds will offer around a 22 basis-point premium above the issuer’s existing debt curve, according to Bloomberg pricing source BVAL at 8am London today.
All bonds sold by UK water companies so for this year are quoted wider than launch spread, according to pricing source CBBT at 2:15pm London. Yet the healthy demand for Severn Trent’s deal suggests investors may not be treating all water utilities the same.
“It is important for investors to separate the good from the bad — not every water company is on the brink of Special Administration, Thames is the only contender,” said Johnathan Owen, a portfolio manager at TwentyFour Asset Management. “Thames is light years away from the quality of Severn Trent.”
Draft determinations released by the industry regulator Ofwat earlier this month categorized Severn’s investment plans as “outstanding”. According to Owen, the draft also gave investors “clarity” about the future of water companies. Severn is the first company to return to the debt market since Ofwat’s draft measures, but South West Water has also announced plans to sell new pound-denominated debt.
“It wouldn’t surprise me if there’s an element of Severn Trent wanting to show they’re not Thames, that the market is open for them, that it was relatively easy for them to issue,” said Andrew Moulder, senior utilities analyst at CreditSights. “The structure of the bond is another positive. It’s never had a whole business securitization so the structure of Thames is totally different. Severn is much simpler.”
According to Moulder, the looming prospect of a Thames Water collapse may be quickening its peers’ debt-raising plans.
“If Thames does get taken into administration, then the whole sector is going wider,” he said.
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