Southern Water - taking a position

All,

Please find our updated analysis here.

We are looking to take a short position in the 6.64% 2026 bonds for 6% of NAV. 

Having done further work on the business plan on the basis of Ofwat’s final determinations, we are confident that the company needs significant fresh liquidity and that unless it is injected junior to the Class A debt (which would make it expensive - no cashflow) it would trigger possibly both, covenants and a downgrade. 

Bonds are unwrapped and trading at IG spreads. We are looking for a 10-15 point drop vs an upside risk of up to 5 points.

Wolfgang