Thames Water - comment

The rating agencies are slowly downgrading over £10 billion of Thames Water bonds (issued via a whole business securitisation) from investment grade to junk. The consequences are negative for the following reasons: increase in borrowing costs, limiting access to capital and the debt markets and losing its operating license. In addition, in the event of a downgrade to junk, these bonds could be excluded from the closely followed ICE BofA fixed income indexes (which are tracked by passive and exchange-traded funds). This creates an interesting dynamic in the bond markets where the downgraded bonds “turn over” from performing credit and passive investors to special situation investors (who do not care about credit ratings and have a different investing agenda). This usually hastens the process of consolidating and organising creditors to prepare for restructuring negotiations. As per previous comments, however, it remains hard to formulate a bid for the paper before we gain more confidence on the way the regulator will set the economics for the company.