Glas Cymru and its financial advisers recently unveiled the GBP2 billion structured financing that is designed to ensure the reliable provision of water and sewerage services to most of Wales for the forseeable future.

The structure, devised by Schroder Salomon Smith Barney and Royal Bank of Scotland, will see Welsh Water issue GBP2 billion of bonds, backed by the GBP435 million of revenues the company collects each year from domestic (70%) and business (30%) customers.

The multi-tranche issue will enable Glas Cymru, a company limited by guarantee, to finance the purchase of Welsh Water from Western Power Distribution of the U.S. for GBP1.8 billion as agreed by the two parties in November. Glas has signed contracts to outsource the operation and maintenance of Welsh Water's assets to United Utilities and the customer billing operation to Thames Water.

The key feature of the financing structure is that the monoline insurer MBIA will provide a wrap for GBP1 billion of the issue. This will be split between the three A tranches of the bond, which will have a triple-A rating from Standard & Poor's, Fitch and Moody's. There will then be three B tranches totalling GBP526 million with A-/A3 ratings, two C tranches totalling GBP250 million with BBB and Baa2 ratings, and a GBP100 million unrated D tranche. There will also be a GBP150 million R tranche to provide the equivalent of a corporate revolving facility for five years, which the two lead managers will underwrite if an when required.

Chris Jones, the finance director at Glas, said that while the broad parameters of the issue were "pretty fixed," the company still had the flexibility within each category to vary the amount of fixed and floating-rate notes as well as the currency split. There will be sterling, dollar and euro-denominated bonds, but the final allocation will be not be made until Glas and its advisers have gauged investor appetite for the different instruments over a three-week road show leading up to the end of April. The issue should then be launched and priced in early May.

The deal had to be structured to overcome the problem that the bondholders could not secure a charge over the assets of an essential regulated utility. Welsh Water's 26,800km of water mains, 17,500km sewer network and 113 water treatment plants have a captive client base and cannot be sold off to anyone else in the event of a default.

"The real security within the structure is that the bondholders can exercise control over the shares of Welsh Water," said Jones. While this falls short of giving them the power to appoint an administrative receiver, said Richard Bartlett, it would put the bondholders' interests "at the top of the heap" in a default scenario.

"It's essentially a defensive measure," agreed Jones. But he said it would enable the bond trustees in a default situation to replace the management team at Welsh Water, at the end of an 18-month standstill period during which interest on the bonds would be met from a GBP150 million liquidity facility provided by RBS.

The debt service cover ratios on the transaction will start at 2.46 on the senior debt and 1.84 on the total debt (pre capital-maintenance), which Jones said should give ample reassurance given the security of the company's revenues. "I think that is a very strong coverage when you consider that the cash flows from this business are about as strong as you can possibly get."

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