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Macquarie-controlled Southern Water requested Ares Administration and different lenders to write down off about £370mn of debt, in an effort to permit new fairness to circulation straight into the utility’s heavily-indebted working firm.
The talks place considered one of America’s largest non-public capital corporations on the centre of the financing struggles at one other debt-laden British water utility, simply as Thames Water has secured an emergency mortgage from a bunch of collectors together with US funds equivalent to Elliott Administration and Silver Level.
Southern — which offers water and sewerage providers to 4.7mn clients within the south-east of England — requested bondholders together with Ares Administration and Australian infrastructure investor Westbourne Capital to write down off all of their debt, in response to individuals acquainted with the matter.
The traders personal debt at Southern’s holding firm stage, which has roughly £370mn of exterior bonds, in response to the corporate’s most up-to-date filings. The debt sits on the prime of the capital construction and much away from the utility’s working belongings, making it dangerous for traders to carry.
Macquarie took a majority stake in Southern in 2021. The Australian investor and the lenders are negotiating a compromise of a partial writedown, however are but to agree on phrases. Macquarie’s calls for are nonetheless too steep for lenders, in response to individuals acquainted with the discussions.
A request for a full writedown was a gap place, the individuals added.
Ares, which oversees practically $550bn in belongings, turned a lender to Southern when it acquired AMP Capital’s infrastructure debt enterprise in 2022. AMP turned a lender to Southern in 2018.
Southern Water’s “midco” lenders, together with Caisse de dépôt et placement du Québec, considered one of Canada’s greatest pension funds, might additionally face writedowns sooner or later. These bondholders sit between the working firm debt and the bonds on the holding firm.
Macquarie, Ares, Southern Water and CDPQ declined to remark. Westbourne Capital didn’t reply to a request for remark.
Southern’s funds are much less fraught than these of Thames Water, which is the UK’s largest water utility and serves 16mn households. However the utility is closely indebted and has come below strain in debt markets amid considerations over its credit standing and the potential for debt covenant breaches.
Alongside the proposed haircut, Southern’s proprietor Macquarie Asset Administration is injecting £900mn of recent fairness into the corporate.
The goal of a writedown is to permit Macquarie inject the entire new cash into Southern’s working firm, reasonably than utilizing a portion of it to service debt on the holding firm stage, in response to individuals acquainted with the matter.
Inside Southern’s advanced construction, the regulated working firm — a “ringfenced” group that’s purported to be protected against stress on the holding corporations above — is nonetheless working with a debt to fairness ratio of about 70 per cent.
After being downgraded to “junk” by ranking company Moody’s in November, Southern has been teetering on the verge of default and is fighting rising borrowing prices throughout its greater than £6bn debt pile.
The fairness injection has cooled a few of the market’s considerations round Southern, with the costs of its bonds recovering. Its “ranking watch damaging” standing was eliminated by ranking company Fitch.
On the finish of final yr the utility borrowed £300mn by promoting senior bonds at its working firm to a bunch of hedge funds at an annual rate of interest of seven.75 per cent. In a sign of its difficulties elevating capital, Southern used a non-public course of primarily geared toward hedge funds for the bond sale.
The rates of interest on the bond issued by Southern are practically thrice increased than Ofwat’s assumed price of borrowing for the sector.
