Southern Water’s credit risk at record high amid Thames water woes

Southern Water’s credit risk has risen to a record high in recent days as hedge funds scramble to hedge against the UK water company’s possible default.

The credit curve of utility swaps is now inverted, meaning it is more expensive for investors to buy short-term default protection than long-term. The one-year CDS was quoted at more than 776 basis points on Monday, compared with about 466 basis points for the five-year, CMAI prices showed, beating the implied risk price for its UK rivals.

Credit default swaps act as debt insurance contracts, meaning sellers would have to pay if Southern Water defaults on its bonds and buyers would cash out. The price moves indicate interest in buying the company’s CDS has increased in recent weeks with Britain’s high debt. utilities face scrutiny amid fallout from Thames Water. Britain’s biggest water supplier is scrambling to raise equity amid a row between shareholders and regulator Ofwat.

Last week, ratings firms Moody’s Ratings and S&P Global Ratings downgraded Thames Water’s debt because they saw a debt restructuring – and consequently a default – as likely within the next 12 months.

Thames Water has sought to raise the 3.3 billion pounds ($4.4 billion) in equity capital it needs to fix chronic leaks, sewage leaks, cope with a growing population and climate change . At the same time, it faces a potential liquidity crunch in the coming months and has been exploring solutions to that with existing lenders, with options ranging from releasing some cash reserves to a new line of credit from some of its debt investors .

Photo: Preparations for the laying of a new discharge pipe at Swalecliffe Wastewater Treatment Works, operated by Southern Water Ltd., in Whitstable, UK. Photo credit: Chris J. Ratcliffe/Bloomberg

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