The U.K. private finance initiative (PFI) has stimulated a number of innovative securitizations from the U.K. utility sector. Now that shareholders have tasted the profitable returns on investments that restructuring in this market can bring, new originators, perhaps even from outside the U.K., are likely to join the party.
"The allure here has had to do more with shareholders gaining a return on investments by using utilities to gain on holdings," said Daniela Katsiamakis at Standard & Poor's. In a report published last week, Katsiamakis explained that the restructuring undergone by U.K. water and wastewater companies in particular has seen shareholder demands augment over the past two years as a result of the relatively low rate of return offered by regulated water businesses.
The operating and financial standards for 2000 through 2005 of the U.K.'s water regulator, the Office of Water Services (OFWAT), make it difficult for water utilities to generate a strong rate of return; simultaneously, the ratings on water companies have suffered as a result of the more difficult regulatory environment.
Consequently, companies are actively moving toward more complex restructurings that allow for greater return, and although these structures are based on high levels of debt, they have demonstrated an ability to minimize risks and achieve investment-grade ratings. According to S&P, mitigating features within the structures typically ensure timely access to adequate liquidity. The structures also display sustainable financial performance through the use of covenants coupled with strong debt management policies and equity support. And in the U.K., companies are able to ring-fence their low-risk cash flows from the higher-risk activity within the wider group.
Over the past 18 months these hybrid securitizations have been executed by Glas Cymru Cfyngedig, Anglian Water Services Financing Plc, Sutton & East Surrey Water PLC, and a number of small water-only companies that have tapped the market through the Artesian conduit. Standard & Poor's said it expects more companies to tap the market in the future.
Just last week the market saw a second GBP45 million tap of Artesian Finance plc, established by the Royal Bank of Scotland, which incorporates a new facility set up to issue conventional fixed-rate sterling bonds only. The existing facility will issue GBP15 million of guaranteed index-linked bonds, while the new conduit, Artesian Finance II, will issue the remaining notes as guaranteed fixed-rate bonds. Separately, French-based Vivendi Environnement recently got the all clear for its purchase of U.K. based Southern Water. The next step expected is a possible refinancing through an operating company securitization structure, said market sources.
"There are a handful of companies left in the U.K. that may opt for securitization," said Katsiamakis. "But this option is not only limited to U.K. companies and can be achieved by any regulated business outside of the U.K." She added that although it was possible to execute similar structures in Europe, U.K. utilities were unique in that these companies have gone through a number of resets on the distribution side that have provided more stable cashflows. In addition, some utilities may be exposed to high-risk retail areas exposing structure to volatility; in the U.K., ring-fencing of the assets bypasses such exposure.
Nothing is expected in the immediate short-term, said Katsiamakis, but companies have expressed interest in the market.