Traders bet on Thames Water crisis contagion as firm races to agree survival plan

Traders at major US hedge funds are betting against the debt and equity of British water companies amid fears over their levels of debt and the risk of contagion across the sector sparked by the crisis engulfing Thames Water.

Millennium Management had disclosed a short position on northwest-focused United Utilities, while Arrowstreet Capital has bet against the southwest’s Pennon. United Utilities has the most debt of any UK water company behind Thames.

Bloomberg, which first reported the news, cited data from S&P Global Market Intelligence showing that short interest on United Utilities had jumped to almost seven per cent on 12 April from two per cent last July.

Meanwhile, short interest in Southern Water bonds jumped to 6.6 per cent this week from roughly 0.8 per cent at the start of the year.

Debt is commonplace across the water sector. Suppliers have collectively amassed more than £51bn in net debt in the 32 years between privatisation in 1991 to March 2023, according to research by the Financial Times.

Even as the sector has come under increasing scrutiny, debt has continued to rise. In the past two years alone, the figure has jumped £8.2bn.

The government is facing the costly prospect of having to temporarily nationalise Thames, which is the UK’s biggest water supplier with some 16m customers, to prevent it from collapsing.

The firm is struggling under a £15.6bn debt pile, which has become increasingly difficult to service amid higher interest rates.

Regulator Ofwat last month rejected Thames’ plan to hike bills by 40 per cent to help ease its debt pile, causing shareholders to pull £500m of emergency funding. The crisis worsened earlier this month when Thames’ parent company Kemble defaulted on around £1.4bn worth of debt.

Thames Water now has under two months to convince Ofwat that it has a feasible survival plan before it publishes a determination on how much water companies can charge customers on 12 June.

Whether Thames can strike a deal with the regulator will be a crucial signal on how likely it is to attract new equity investors and avoid falling into special administration.

Royal London, among the asset managers most exposed to Kemble’s bonds, has argued that if the government takes over Thames, and triggers losses for bondholders, it could deter much-needed investment from other infrastructure assets.

Kemble is expected to miss its repayment deadline for a £190m loan to a consortium of four banks, including two state-owned Chinese lenders, at the end of this month.

Thames has said it has £2.4bn of liquidity available and can still meet its commitments until at least May 2025. However, high borrowing costs and fines from Ofwat risk significantly shrinking this cash pile.

City A.M. approached Thames for comment.