While U.K. regulators are still partial to the use of equity-related models for the financial restructuring and refinancing of domestic water companies, the recent use of debt financing by Glas Cymru and Welsh Water has paved the way for similar companies to consider accessing the capital markets, market observers say, and may be an important milestone for the industry.
With an estimated GBP10 billion to GBP15 billion required in new investments, the U.K. water companies are attracted to certain structural and ratings-related advantages which debt financing and securitization-style transactions offer them. "The part of the Welsh Water deal that might be replicated is the attempt to isolate or use bankruptcy-remote vehicles, as well as some of those structural elements that would isolate the strong credit of the water companies," said S&P analyst Anthony Flintoff. "Other water companies are looking at what has been done already and how that might be applicable to their business."
The Welsh Water deal, in particular, not only exemplified 100% access to the capital markets, but also demonstrated that there are viable alternatives to equity models for the refinancings. Market observers turned their attention to the degree of leverage which the GBP 2 billion deal offered, as well as the tranching, which included GBP1 billion of the issue wrapped by MBIA, split between the three A tranches of the bond. The deal also included three B tranches totaling GBP526 million, two C tranches totaling GBP250 million and a GBP100 million D tranche. Counted within the deal was also an R tranche that extended the equivalent of a five-year, corporate revolving facility.
Both Sutten and East Surrey Water PLC, who completed deals prior to the Welsh Water deal, also used a similar structure as a way of isolating the credit of the water company from the other activities of East Surrey Holdings PLC, the parent company.
An isolated case?
Companies currently considering future restructuring, such as Anglian Water Services Ltd., are heartened by the success of the recent water deals, as it indicates that more functional debt-related structures can be developed going forward, a spokesman from AWG said.
"Regulators have taken great pains to let us know that 100% debt financings are not the future, but what they ask is that we consider equity a portion of our deals that could translate to 50% or less," he added. "If a deal like [Glas Cymru] got done, it means that [these types of deals] can get done."
In the meantime Anglian is assuring its full access to debt financing across the Atlantic. The water company issued a $435 million private placement late last week that is expected to garner enough investor interest in the U.S. capital markets to keep pricing on its four-year, five-year, seven-year, eight-year and 10-year bullet tranches within a tight 180 to 200 basis points over Treasury range.
Nonetheless, U.K. regulators are still partial to the equity models for ownership. Some observers note that Welsh Water's situation was unique in that electric utility Western Power Distribution (WPD), the former parent of Welsh Water, decidedly wanted to get out of the water business. Further, Wales has its own parliamentary legislation, which created a unique financial and political circumstance that is impossible to duplicate outside the region, the AWG spokesman said.
"Welsh Water was sold by [WPD] to Glaus at a discount to its regulatory asset base and most shareholders of the selling company might look at it and say, We are not getting full value for what we think the assets are worth," explained a source at MBIA. "It's one thing that is going to be very difficult for other water companies, or any company that wants to structure along this basis to copy."
