UK’s Southern Water Asks Some Creditors to Write Off Risky Debt

(Bloomberg) -- UK utility Southern Water Ltd. has asked some of its creditors to write off part of their debt, according to people familiar with the matter, as owner Macquarie Asset Management injects fresh funds into the company.

The company requested the concession from debt holders at the riskier, holding company level, the people said, asking not to be identified discussing a private matter. Total external debt at this level stood at £380 million ($493 million) as of March 2024, the latest figures available.

Creditors, however, are unhappy with the terms on offer and are pushing for better ones, they added. Lenders at various levels of the company’s capital structure have hired advisers to assess their options, Bloomberg previously reported.

The proposed haircuts would be a form of burden-sharing with equity investors. The utility said in February that it was raising £900 million ($1.2 billion) from its shareholders as part of an effort to stabilize its finances. It’s also seeking to preserve its investment-grade status — without which it would be in breach of its operating license — ringfence the equity injection to grow the business, and avoid the kind of debt headaches that have plagued Thames Water.

Southern Water needs to strike a deal with its creditors in the coming weeks to avoid a downgrade. Analysts at S&P Global Ratings have warned it could be cut to junk status unless it secures additional funding sources to repay some operating company debt, swaps and mandatory breaks by the end of March, and receives a significant portion of the Macquarie equity by June. 

Representatives for Southern Water and Macquarie declined to comment.

The company requires at least two high-grade ratings to keep its operating license. Fitch Ratings removed it from its review list for a potential downgrade following the announcement on the fresh £900 million of equity. But given that Moody’s Ratings has already downgraded Southern Water to junk, another ratings cut would see it face potential enforcement action by regulator Ofwat. 

The UK water industry has been roiled by crises, with the country’s top supplier Thames Water now in the middle of a debt restructuring process with its creditors while it seeks a new owner to turn its finances around and fend off temporary nationalization. The trouble in the sector follows decades of poor regulatory oversight that allowed company owners to pay themselves billions of pounds in dividends instead of using the money to improve infrastructure.

Southern’s Finances

Southern Water had £6.7 billion of net debt, in total, as of last September. 

A £75 million term loan issued by its holding company — part of the £380 million — is coming due next month, according to data compiled by Bloomberg. These are the liabilities sitting further away from the company’s operations and assets, and as such are considered the riskiest.

The holding company debt is serviced by cash funneled up from entities at the intermediate level. Southern Water’s capital structure also includes more than £400 million of external liabilities for these so-called Midcos, which depend on distributions received from the operating company.  

The majority of the debt sits at the operating company level and is deemed the safest.

The negotiations over how the debt structure will look like in the future are going down smoother at the levels below the holding companies, according to people familiar with the matter. That’s because creditors to those entities are being asked to make fewer concessions, they added. 

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