1 00:00:15,720 --> 00:00:18,800 Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast. 2 00:00:19,079 --> 00:00:21,720 Speaker 1: My name is James Crombie. I'm a senior editor at Bloomberg. 3 00:00:22,360 --> 00:00:24,280 Speaker 1: This week, we're very pleased to have on the show 4 00:00:24,560 --> 00:00:28,720 Speaker 1: Carmen Arroyo, who covers structured markets for Bloomberg News in 5 00:00:28,720 --> 00:00:30,640 Speaker 1: New York. How are you, Carmen, I'm good. 6 00:00:30,720 --> 00:00:31,960 Speaker 2: Thank you for having me, James. 7 00:00:32,040 --> 00:00:34,600 Speaker 1: We're also delighted to welcome back Paul Vickers, who covers 8 00:00:34,720 --> 00:00:39,040 Speaker 1: utilities for Bloomberg Intelligence in London. Hello, Paul, James. We'll 9 00:00:39,080 --> 00:00:41,120 Speaker 1: be coming back to Paul to talk about Thames Water, 10 00:00:41,440 --> 00:00:44,720 Speaker 1: the UK utility that's blowing up and dragging the whole 11 00:00:44,720 --> 00:00:49,479 Speaker 1: sector down. So do stay with us. But first, Carmen 12 00:00:49,560 --> 00:00:52,800 Speaker 1: Arroyo with Bloomberg News, what's the big story now with 13 00:00:52,880 --> 00:00:54,080 Speaker 1: asset backed securities? 14 00:00:54,480 --> 00:00:56,840 Speaker 2: Sure, well, thank you so much for having me. But 15 00:00:57,280 --> 00:00:59,360 Speaker 2: let's talk a little bit about asset backed securities. As 16 00:00:59,360 --> 00:01:04,040 Speaker 2: you said, sip back securities are basically bonds that repackage 17 00:01:04,080 --> 00:01:08,319 Speaker 2: any type of consumer dead and they're typically very safe 18 00:01:08,360 --> 00:01:12,040 Speaker 2: and investors love them. The problem right now is that 19 00:01:12,480 --> 00:01:15,440 Speaker 2: the dead that they repackage, which is given to consumers, 20 00:01:16,040 --> 00:01:20,399 Speaker 2: is got getting a little bit more hairy. Consumers are 21 00:01:20,440 --> 00:01:24,160 Speaker 2: basically running out of pandemic savings, so they're falling back 22 00:01:24,200 --> 00:01:27,119 Speaker 2: on their payments, and some of the loans they took out, 23 00:01:27,120 --> 00:01:30,080 Speaker 2: they're just not paying them back, which is impacting the 24 00:01:30,120 --> 00:01:33,400 Speaker 2: bonds that are or this impacting the bonds that are 25 00:01:33,400 --> 00:01:36,640 Speaker 2: associated with those loans. And that's specially true in the 26 00:01:36,680 --> 00:01:37,959 Speaker 2: subprem autos sector. 27 00:01:38,319 --> 00:01:39,840 Speaker 1: So let's just break that down a little bit for 28 00:01:39,840 --> 00:01:42,400 Speaker 1: those people who don't know this stuff. Asset backed securities. 29 00:01:42,959 --> 00:01:45,440 Speaker 1: I mean, you know, David Bowie once got a big 30 00:01:45,480 --> 00:01:50,360 Speaker 1: loan from repackaging revenue from future music sales. Then streaming 31 00:01:50,400 --> 00:01:53,240 Speaker 1: came along, so that didn't work out so well for investors, 32 00:01:53,600 --> 00:01:55,720 Speaker 1: but he did get the money. And then in two 33 00:01:55,800 --> 00:01:59,880 Speaker 1: thousand and eight the global financial crisis, structured finance ced. 34 00:02:00,600 --> 00:02:04,920 Speaker 1: All these structured products were responsible for the implosion of 35 00:02:04,960 --> 00:02:10,320 Speaker 1: the global financial system. What about for cars car loans? 36 00:02:10,360 --> 00:02:11,400 Speaker 1: How does this all work? 37 00:02:11,720 --> 00:02:14,639 Speaker 2: Yeah? Sure, so how it works is basically, if you're 38 00:02:14,720 --> 00:02:17,320 Speaker 2: like a subprime model lender, you're basically a company that 39 00:02:17,360 --> 00:02:20,880 Speaker 2: gives out loans to consumers that need a loan for 40 00:02:20,919 --> 00:02:24,520 Speaker 2: a car. Right, So, in order to get more capital in, 41 00:02:24,639 --> 00:02:26,840 Speaker 2: what you do is you put all those loans together 42 00:02:27,240 --> 00:02:29,640 Speaker 2: and you sell them as a bond to investors in 43 00:02:29,680 --> 00:02:32,360 Speaker 2: Wall Street, and then that way you can access like 44 00:02:32,520 --> 00:02:36,120 Speaker 2: cheap financing. That's usually how it works. It's just putting 45 00:02:36,160 --> 00:02:39,720 Speaker 2: together a bunch of different loans and then repackage them 46 00:02:39,760 --> 00:02:43,800 Speaker 2: as a bond. So it's basically like financial engineering, like 47 00:02:43,840 --> 00:02:47,440 Speaker 2: it's a secondary market for the debt. Does that make sense? 48 00:02:47,760 --> 00:02:50,119 Speaker 1: Yeah, that's good, But so then why are we talking 49 00:02:50,120 --> 00:02:52,639 Speaker 1: about them now? What's the big deal with abs and 50 00:02:52,880 --> 00:02:54,760 Speaker 1: why in particular in the car sector. 51 00:02:55,600 --> 00:02:59,200 Speaker 2: Sure, So, this shit that's happening in the auto abs 52 00:02:59,240 --> 00:03:02,639 Speaker 2: world is that consumers are increasingly not paying back their 53 00:03:02,680 --> 00:03:06,400 Speaker 2: auto loans. And that's usually fine, but it's not fine 54 00:03:06,480 --> 00:03:11,160 Speaker 2: for bonds associated with two specific lenders. Those are American 55 00:03:11,200 --> 00:03:14,880 Speaker 2: Car Center and US Auto Sales. Those two subprime lenders 56 00:03:14,919 --> 00:03:18,240 Speaker 2: basically close down their dealerships and close down their businesses 57 00:03:18,240 --> 00:03:21,239 Speaker 2: like a few months ago, So consumers that had loans 58 00:03:21,240 --> 00:03:24,680 Speaker 2: with them are no longer paying them back and that's 59 00:03:24,760 --> 00:03:29,040 Speaker 2: becoming an issue for Wall Street. There are bondholders out 60 00:03:29,040 --> 00:03:32,600 Speaker 2: there that own the riskiest trenches of those bonds that 61 00:03:32,639 --> 00:03:36,240 Speaker 2: are associated with those loans, and they're starting to get 62 00:03:36,240 --> 00:03:40,840 Speaker 2: worried because the borrowers are defaulting a lot on their debt. 63 00:03:42,840 --> 00:03:44,840 Speaker 2: So the issue there is that if they fought, if 64 00:03:45,200 --> 00:03:48,760 Speaker 2: a critical mass of borrowers stopping back their dead, they 65 00:03:48,800 --> 00:03:52,560 Speaker 2: could take losses on the bonds. And that's basically never 66 00:03:52,680 --> 00:03:55,680 Speaker 2: happened in auto bonds. Just a couple times in the 67 00:03:55,760 --> 00:04:00,240 Speaker 2: nineties and it was like really really different scenario. So 68 00:04:00,280 --> 00:04:02,920 Speaker 2: Wall Street is starting to get worried about how like 69 00:04:03,160 --> 00:04:06,560 Speaker 2: consumers are paying back their debt or not within the 70 00:04:06,600 --> 00:04:07,320 Speaker 2: auto sector. 71 00:04:07,800 --> 00:04:10,400 Speaker 1: Why is it so unusual to see losses here, Well. 72 00:04:10,360 --> 00:04:13,040 Speaker 2: It's very unusual because the way this bonds work is 73 00:04:13,040 --> 00:04:15,760 Speaker 2: that you put up a lot of collateral I meaning 74 00:04:15,760 --> 00:04:18,320 Speaker 2: you put up a lot more loans than you expect 75 00:04:18,360 --> 00:04:21,680 Speaker 2: them to default. So when that one loan defaults, you 76 00:04:21,720 --> 00:04:24,680 Speaker 2: take it out of the basket. But right now so 77 00:04:24,760 --> 00:04:27,760 Speaker 2: many loans are defaulting that there's just not enough protection 78 00:04:27,880 --> 00:04:31,080 Speaker 2: for investors. So these like the borrowers are like the 79 00:04:31,080 --> 00:04:34,039 Speaker 2: bond holders of those risky ast trenches, stand to take 80 00:04:34,160 --> 00:04:37,600 Speaker 2: losses if borers keep defaulting at the same rate, and 81 00:04:37,640 --> 00:04:40,680 Speaker 2: that's we're almost there, basically, and that would be a 82 00:04:40,720 --> 00:04:43,760 Speaker 2: really big deal for the audubon market because it's just 83 00:04:43,839 --> 00:04:49,600 Speaker 2: never happened before in the public audubon space, like subprime. Yes, 84 00:04:49,680 --> 00:04:52,640 Speaker 2: so it's it's it's supprime. It's not prime dead, so 85 00:04:52,720 --> 00:04:55,359 Speaker 2: it's prime. It's dead given out to kind of like 86 00:04:55,400 --> 00:04:58,239 Speaker 2: the riskiest borrowers, like people that have like maybe lower 87 00:04:58,240 --> 00:05:01,640 Speaker 2: FICO scores or that have like maybe don't have W two. 88 00:05:01,680 --> 00:05:05,880 Speaker 2: So it just depends. But it's usually like bor wars 89 00:05:05,920 --> 00:05:09,240 Speaker 2: that have like lower credit scores or lower capability of 90 00:05:09,279 --> 00:05:10,000 Speaker 2: paying it back. 91 00:05:10,640 --> 00:05:12,880 Speaker 1: But by subprime, I mean, you know, the last time 92 00:05:12,880 --> 00:05:15,920 Speaker 1: I heard subprime defaults on this scale, it was two 93 00:05:15,920 --> 00:05:18,440 Speaker 1: thousand and eight and the whole housing market was falling 94 00:05:18,440 --> 00:05:21,000 Speaker 1: apart and that led to a catastrophe. We talk about 95 00:05:21,000 --> 00:05:22,440 Speaker 1: the same same scale here. 96 00:05:22,720 --> 00:05:25,640 Speaker 2: It's not the same scale though. First of all, like 97 00:05:25,960 --> 00:05:28,559 Speaker 2: other loans are much shorter in nature, so they're also 98 00:05:28,640 --> 00:05:31,400 Speaker 2: like the loan sizes are smaller. It's not like if 99 00:05:31,440 --> 00:05:33,919 Speaker 2: you have a mortgage, like a mortgage is almost in 100 00:05:33,960 --> 00:05:36,400 Speaker 2: the US, a mortgage can be like a thirty year product, 101 00:05:36,720 --> 00:05:39,640 Speaker 2: so you're really tied to that as a borrower, but 102 00:05:39,720 --> 00:05:42,359 Speaker 2: like auto loans can be like five years, can be 103 00:05:42,400 --> 00:05:44,560 Speaker 2: three years, so you can kind of pay it back. 104 00:05:44,600 --> 00:05:47,839 Speaker 2: So it's not the same scale at all, And in 105 00:05:47,880 --> 00:05:50,839 Speaker 2: this case in subprime auto bones, it's just this is 106 00:05:50,920 --> 00:05:54,400 Speaker 2: happening subprime auto bones defaulting. It's just happening with some 107 00:05:54,640 --> 00:05:59,080 Speaker 2: lenders that were particularly tailored to risky borrowers. So it's 108 00:05:59,080 --> 00:06:01,120 Speaker 2: not happening across the space yet. 109 00:06:01,560 --> 00:06:03,560 Speaker 1: And some investors are going to take a loss. How 110 00:06:03,640 --> 00:06:05,120 Speaker 1: much are they going to lose? They're going to get 111 00:06:05,120 --> 00:06:06,160 Speaker 1: wiped out, They. 112 00:06:06,120 --> 00:06:08,240 Speaker 2: Could get they could potentially get wiped out. We just 113 00:06:08,279 --> 00:06:12,360 Speaker 2: have to see how those defaults evolve. So if if 114 00:06:12,360 --> 00:06:15,279 Speaker 2: a critical mass actually defaults, yes, they could stand to 115 00:06:15,320 --> 00:06:18,440 Speaker 2: lose almost everything on those bonds, like they would take 116 00:06:18,520 --> 00:06:20,919 Speaker 2: losses on the principle, not on the interest, which is 117 00:06:20,960 --> 00:06:24,680 Speaker 2: a pretty big deal. But we we still have to see. 118 00:06:24,680 --> 00:06:25,640 Speaker 2: We're not there yet. 119 00:06:26,520 --> 00:06:30,679 Speaker 1: So some investors, you know, large investors, presumably institutional guys, 120 00:06:30,720 --> 00:06:35,520 Speaker 1: they took some risk. Now they take some losses. Who cares? 121 00:06:35,520 --> 00:06:37,320 Speaker 1: I mean, is there a bigger impact from this? I mean, 122 00:06:37,400 --> 00:06:39,960 Speaker 1: is there a ripple effect that that rips through the 123 00:06:40,080 --> 00:06:42,760 Speaker 1: entire structure finance market? Is there something that's going to 124 00:06:42,760 --> 00:06:44,320 Speaker 1: blow up here? Do you think so? 125 00:06:44,360 --> 00:06:46,680 Speaker 2: One of them One of the bigger takeaways of this 126 00:06:46,839 --> 00:06:52,479 Speaker 2: is just like this, this subprime lenders. Auto lenders kind 127 00:06:52,480 --> 00:06:54,640 Speaker 2: of like started relying a lot on the ASCID backed 128 00:06:54,640 --> 00:06:58,359 Speaker 2: securities market to get liquidity, and they issued like their 129 00:06:58,400 --> 00:07:01,000 Speaker 2: issuance went up by a lot in the past five years. 130 00:07:01,839 --> 00:07:04,880 Speaker 2: So kind of the takeaway is that if investors start 131 00:07:04,920 --> 00:07:08,240 Speaker 2: losing faith on these kind of bonds, how are these 132 00:07:08,360 --> 00:07:11,040 Speaker 2: lenders going to get financing? And do we expect to 133 00:07:11,040 --> 00:07:13,400 Speaker 2: see more of these slenders go bankrupt? 134 00:07:13,760 --> 00:07:17,120 Speaker 1: And then sort of underlying it though, I mean, is 135 00:07:17,160 --> 00:07:20,160 Speaker 1: this just really a story about the US consumer? Is 136 00:07:20,200 --> 00:07:22,000 Speaker 1: that where the pressure is coming from. 137 00:07:22,080 --> 00:07:25,560 Speaker 2: Yeah, that's correct, And it goes back to the same thing, right, like, 138 00:07:25,560 --> 00:07:29,160 Speaker 2: if there's fewer subprime lenders out there available to give 139 00:07:29,240 --> 00:07:33,040 Speaker 2: credit to consumers, where a consumers going to get financing 140 00:07:33,080 --> 00:07:35,480 Speaker 2: for their needs, They're just going to be squeezed out 141 00:07:35,480 --> 00:07:36,080 Speaker 2: of the market. 142 00:07:36,640 --> 00:07:39,920 Speaker 1: And those subprime consumers that we're talking about, they depend 143 00:07:40,520 --> 00:07:42,960 Speaker 1: on a car in lots of cases for their livelihood. 144 00:07:42,960 --> 00:07:45,080 Speaker 1: They need it to get to work. It's the last 145 00:07:45,080 --> 00:07:47,120 Speaker 1: thing they'll give up, you know, before that. You know, 146 00:07:47,600 --> 00:07:49,960 Speaker 1: maybe housing is the last bit, but the car is 147 00:07:50,320 --> 00:07:52,920 Speaker 1: next to the last. Does it imply some kind of 148 00:07:52,960 --> 00:07:56,120 Speaker 1: desperation on the palf of the American consumers. 149 00:07:56,440 --> 00:07:59,640 Speaker 2: It's definitely showing that there's a portion of American consumers 150 00:07:59,640 --> 00:08:03,240 Speaker 2: that can not would stand this current rates, current rate environment, 151 00:08:03,320 --> 00:08:06,520 Speaker 2: and they're just running out of pandemic savings and if 152 00:08:06,520 --> 00:08:08,960 Speaker 2: they can't get liquidity from you know, their credit cards, 153 00:08:09,000 --> 00:08:11,000 Speaker 2: so they're auto dead. Where are they going to go? 154 00:08:11,480 --> 00:08:15,480 Speaker 2: So it definitely signals that the economy is turning. 155 00:08:16,240 --> 00:08:18,080 Speaker 1: Is there any regional pattern to this? Are there parts 156 00:08:18,080 --> 00:08:19,560 Speaker 1: of the country that are doing better or worse? 157 00:08:19,680 --> 00:08:21,120 Speaker 2: As far as we know, so the lenders that have 158 00:08:21,200 --> 00:08:24,760 Speaker 2: gone bust, we're mostly and more in the South and 159 00:08:24,840 --> 00:08:29,280 Speaker 2: in the north of the US, But it's broadly speaking, 160 00:08:29,320 --> 00:08:30,840 Speaker 2: it's happening and across the country. 161 00:08:31,320 --> 00:08:34,600 Speaker 1: So just going back to the financial engineering aspect, you 162 00:08:34,679 --> 00:08:37,480 Speaker 1: mentioned that that term always really worries me. You know, 163 00:08:37,520 --> 00:08:41,120 Speaker 1: the most complex, least transparent markets are often where trouble starts. 164 00:08:42,080 --> 00:08:44,920 Speaker 1: You know, how worried should we be about structured finance 165 00:08:45,000 --> 00:08:46,720 Speaker 1: right now? Are we expecting this to lead to another 166 00:08:47,080 --> 00:08:48,080 Speaker 1: financial crisis? 167 00:08:48,840 --> 00:08:51,640 Speaker 2: I don't think it's going to be a broad financial crisis. 168 00:08:51,640 --> 00:08:54,160 Speaker 2: I think we're going to see it more like kind 169 00:08:54,160 --> 00:08:57,440 Speaker 2: of like more pockets of the market go bad. So 170 00:08:57,640 --> 00:09:00,760 Speaker 2: just like for instance, in the Audobonne space, it's subprime 171 00:09:00,800 --> 00:09:04,560 Speaker 2: auto and it's specific lenders, and I think that's going 172 00:09:04,600 --> 00:09:08,840 Speaker 2: to basically happen across everything that's structured. It's just like 173 00:09:08,960 --> 00:09:12,439 Speaker 2: specific pockets, specific companies that are that cannot withstand the 174 00:09:12,480 --> 00:09:14,520 Speaker 2: current rate environment, and that kind of grew a lot 175 00:09:14,600 --> 00:09:16,000 Speaker 2: when rates were really row. 176 00:09:16,320 --> 00:09:18,079 Speaker 1: And the rates on these things. A lot of it's 177 00:09:18,120 --> 00:09:21,080 Speaker 1: floating rate, right, so it just as base rates rise. 178 00:09:21,720 --> 00:09:25,240 Speaker 2: Yeah, it really depends, for instance, like mortgages are mostly fixed, 179 00:09:25,280 --> 00:09:27,600 Speaker 2: Like it really depends on what product we're talking about. 180 00:09:27,600 --> 00:09:33,160 Speaker 2: But yes, it like you're just seeing more consumers struggle 181 00:09:33,200 --> 00:09:35,080 Speaker 2: with how much they have to pay on their debt. 182 00:09:35,320 --> 00:09:37,880 Speaker 1: So before we talk to Pull Vickers at Bloomberg Intelligence, 183 00:09:37,920 --> 00:09:40,040 Speaker 1: what's the next big thing we should be watching here? 184 00:09:40,080 --> 00:09:42,880 Speaker 1: Common more downgrades, more losses, more distress. 185 00:09:43,280 --> 00:09:46,439 Speaker 2: Yeah, that's basically we should be watching for which subprime 186 00:09:46,520 --> 00:09:49,640 Speaker 2: lender is going to struggle next basically? And were are 187 00:09:49,679 --> 00:09:51,640 Speaker 2: they going to go for liquidity if they can't go 188 00:09:51,760 --> 00:09:53,400 Speaker 2: to the bond market, are they going to go to 189 00:09:53,400 --> 00:09:56,240 Speaker 2: private credit? Are they going to go to distressed buyers? Like, 190 00:09:56,720 --> 00:09:58,200 Speaker 2: what's the next step for them? 191 00:09:58,600 --> 00:10:01,880 Speaker 1: Great stuff? Karaman from Bloomberg News Thank you so much 192 00:10:01,920 --> 00:10:04,679 Speaker 1: for joining us. Read all of Carmen's scoops on the 193 00:10:04,679 --> 00:10:07,760 Speaker 1: Bloomberg terminal and of course at Bloomberg dot com. So, 194 00:10:07,800 --> 00:10:10,480 Speaker 1: as I mentioned earlier, there's a crisis in the UK 195 00:10:10,600 --> 00:10:12,880 Speaker 1: water sector and we're very pleased to have with us 196 00:10:12,920 --> 00:10:16,760 Speaker 1: Paul Vickers, who covers utilities for Bloomberg Intelligence based in London. 197 00:10:17,120 --> 00:10:18,959 Speaker 1: How's it going, Paul James? 198 00:10:19,040 --> 00:10:22,040 Speaker 3: Hi, we'll go here Banks. 199 00:10:21,320 --> 00:10:25,800 Speaker 1: Great So Thames Water. It's the UK's biggest water provider. 200 00:10:26,520 --> 00:10:30,079 Speaker 1: They polluted the rivers and they're being investigated by regulators 201 00:10:30,120 --> 00:10:33,559 Speaker 1: and they're at risk of being nationalized because they can't 202 00:10:33,559 --> 00:10:37,440 Speaker 1: pay back eighteen billion dollars equivalent in debt. Things are evolving. 203 00:10:37,640 --> 00:10:41,360 Speaker 1: We're talking on July fifth. But what's the situation today, Paul. 204 00:10:41,360 --> 00:10:43,040 Speaker 1: The bonds have dropped again. What's the latest. 205 00:10:43,360 --> 00:10:45,480 Speaker 3: Well, the bonds are certainly jumping around quite a lot. 206 00:10:45,520 --> 00:10:47,840 Speaker 3: I mean, if we don't usually get this volatility in 207 00:10:47,920 --> 00:10:51,160 Speaker 3: water barns, it should be very stable and stable regime. 208 00:10:51,200 --> 00:10:53,640 Speaker 3: But waiting for Thames Water to release their annual report, 209 00:10:53,679 --> 00:10:56,520 Speaker 3: which is due by the fifteenth of June. That should 210 00:10:56,559 --> 00:10:58,880 Speaker 3: give a lot more information. We're also waiting for us 211 00:10:58,920 --> 00:11:02,000 Speaker 3: to see if they can get another billion pounds from 212 00:11:02,000 --> 00:11:05,720 Speaker 3: their shareholders who have stump to up around half a 213 00:11:05,760 --> 00:11:08,440 Speaker 3: billion only in March of this year. They probably need 214 00:11:08,440 --> 00:11:11,480 Speaker 3: that other billion that they had here marching their business plan, 215 00:11:11,840 --> 00:11:14,480 Speaker 3: the eight year business plan from the launch in twenty 216 00:11:14,480 --> 00:11:17,920 Speaker 3: twenty one. Of course the CEO is resigned syntense, maybe 217 00:11:17,920 --> 00:11:22,360 Speaker 3: that business plan is maybe not so valid anymore, but 218 00:11:22,440 --> 00:11:26,760 Speaker 3: certainly they need to get that money from shareholders and 219 00:11:26,840 --> 00:11:30,680 Speaker 3: press reports at the weekend we're encouraging in that respect, 220 00:11:30,760 --> 00:11:32,960 Speaker 3: but they certainly need that otherwise they are at risk 221 00:11:33,000 --> 00:11:37,640 Speaker 3: of getting put into what's called special Administration Regime regime 222 00:11:37,960 --> 00:11:39,959 Speaker 3: or SAAR, which as you mentioned, is a sort of 223 00:11:40,160 --> 00:11:42,960 Speaker 3: it's a form of there's an alternative to insolvent if you like, 224 00:11:43,040 --> 00:11:47,439 Speaker 3: imposed by the regulator on essential services like energy and 225 00:11:48,280 --> 00:11:51,400 Speaker 3: water to ensure that these companies can keep providing the 226 00:11:51,440 --> 00:11:55,560 Speaker 3: services to essential services to the customers while a new 227 00:11:55,679 --> 00:11:58,439 Speaker 3: buyer is found. And this is the last time we 228 00:11:58,480 --> 00:12:02,199 Speaker 3: saw this was Bold Energy during the energy crisis, and 229 00:12:02,240 --> 00:12:04,760 Speaker 3: you can getting transferred to Octopus Energy. So we have 230 00:12:04,840 --> 00:12:08,440 Speaker 3: one example of this happening. You know, obviously bondholders and 231 00:12:08,440 --> 00:12:10,040 Speaker 3: everyone termes of work, I'm sure I hopes we can 232 00:12:10,080 --> 00:12:12,720 Speaker 3: avoid the second one, but I think for that to happen, 233 00:12:12,760 --> 00:12:15,160 Speaker 3: it is going to need quite a considerable cash injection 234 00:12:15,920 --> 00:12:19,520 Speaker 3: from existing shareholders, and hopefully will have that. I assume 235 00:12:19,640 --> 00:12:22,560 Speaker 3: the news may come with any report on the fifteenth 236 00:12:22,559 --> 00:12:24,719 Speaker 3: of June, which is the regulatory deadline, at least with 237 00:12:24,720 --> 00:12:27,320 Speaker 3: the anual report. So we go, we're keeping it on 238 00:12:27,360 --> 00:12:28,160 Speaker 3: the news until then. 239 00:12:28,400 --> 00:12:31,679 Speaker 1: As you say, Paul, the water is a very stable business. 240 00:12:32,240 --> 00:12:33,920 Speaker 1: What's the history though? How did it get into so 241 00:12:34,000 --> 00:12:34,520 Speaker 1: much trouble? 242 00:12:35,160 --> 00:12:38,320 Speaker 3: Well, yeah, terms does have the highest gearing in a sect, 243 00:12:38,559 --> 00:12:40,800 Speaker 3: as you say that, they've got about fourteen billion pounds 244 00:12:40,840 --> 00:12:43,559 Speaker 3: worth of debt eighteen billion dollars as you say, but 245 00:12:43,679 --> 00:12:47,199 Speaker 3: this amounts around eighty percent of the sort of regulatory 246 00:12:47,240 --> 00:12:50,920 Speaker 3: capital value, and that's above what of what caees is 247 00:12:51,000 --> 00:12:53,480 Speaker 3: sort of acceptable level of sixty percent. That's a level 248 00:12:53,520 --> 00:12:56,080 Speaker 3: that it it has set its sort of regulatory formula 249 00:12:56,200 --> 00:12:59,760 Speaker 3: on and remunerates companies accordingly. So it cont a free 250 00:12:59,840 --> 00:13:02,760 Speaker 3: this they're gearing above the sixty percent hide life and 251 00:13:02,800 --> 00:13:04,720 Speaker 3: Thames has been an eighty percent for many years and 252 00:13:04,760 --> 00:13:07,480 Speaker 3: plans to stay there for many more. But of course, yeah, 253 00:13:07,520 --> 00:13:11,400 Speaker 3: this increases the risk and the return profile you know 254 00:13:11,679 --> 00:13:14,400 Speaker 3: for shareholders. But obviously the risk side of that has 255 00:13:14,440 --> 00:13:18,360 Speaker 3: been exposed by larger well AA and a poor operational performance. 256 00:13:18,440 --> 00:13:20,040 Speaker 3: You say that they they've got a poor rep track 257 00:13:20,120 --> 00:13:23,120 Speaker 3: record on more water leakage and sewer leakage. They've been 258 00:13:23,120 --> 00:13:26,680 Speaker 3: fined for that customer service, that their operation record isn't good. 259 00:13:26,720 --> 00:13:29,200 Speaker 3: But the bigger problem really is sort of financial pressure 260 00:13:29,200 --> 00:13:31,439 Speaker 3: there under and all of that arises from the spike 261 00:13:31,559 --> 00:13:34,680 Speaker 3: inflation which we've seen over the last year or so 262 00:13:34,800 --> 00:13:37,600 Speaker 3: in the UK. Yeah, this has a number of effects 263 00:13:37,600 --> 00:13:40,160 Speaker 3: on Thames Water and really it's the factor that it's 264 00:13:40,720 --> 00:13:43,160 Speaker 3: putting them under financial pressure and if their regulators see 265 00:13:43,559 --> 00:13:45,959 Speaker 3: deems they might be unlikely to be able to pay 266 00:13:46,000 --> 00:13:48,120 Speaker 3: their debts, and that's a subjective due from the regulator, 267 00:13:48,360 --> 00:13:50,439 Speaker 3: they can put them into an SAAR. And all the 268 00:13:50,480 --> 00:13:52,520 Speaker 3: evidence and points to the fact that they are certainly 269 00:13:52,520 --> 00:13:56,800 Speaker 3: getting very very tight against the sort of interest cover ratishops. 270 00:13:57,320 --> 00:13:59,880 Speaker 3: I mean, what's happening is, you know, earnings are decreasing, 271 00:14:00,280 --> 00:14:03,560 Speaker 3: is the cost to replace pipes and pay their staff 272 00:14:03,559 --> 00:14:07,440 Speaker 3: are increasing a lot faster than their revenues. It's sort 273 00:14:07,440 --> 00:14:11,280 Speaker 3: of increasing interest costs on their debt fifty eight percent, 274 00:14:11,400 --> 00:14:14,440 Speaker 3: which is linked to RPI, and also any on any 275 00:14:14,480 --> 00:14:17,439 Speaker 3: new debt issue in the market. Has also seen that 276 00:14:17,480 --> 00:14:21,920 Speaker 3: the fair value of the index link which increases with inflation, 277 00:14:22,280 --> 00:14:24,960 Speaker 3: and that's rising fast, and the regulatory caple value, So 278 00:14:25,000 --> 00:14:27,520 Speaker 3: all of these things that are coming into play. Particular 279 00:14:27,560 --> 00:14:31,040 Speaker 3: is RPI has moved well above CPI, which is what 280 00:14:31,080 --> 00:14:33,600 Speaker 3: their revenues are based on. The gaps now around four percent, 281 00:14:33,720 --> 00:14:36,560 Speaker 3: so the costs are rising four percent faster than the 282 00:14:36,600 --> 00:14:40,360 Speaker 3: revenues are increasing at the same time, so actually say 283 00:14:40,360 --> 00:14:43,920 Speaker 3: reducing earning, it's reducing interest cover, it's increasing gearing is 284 00:14:43,960 --> 00:14:47,800 Speaker 3: putting a lot of pressure on those and almost covenant levels, 285 00:14:47,800 --> 00:14:49,960 Speaker 3: and the last time they re bought with them in September, 286 00:14:49,960 --> 00:14:52,880 Speaker 3: they're getting close to what we call a trigger covenant level, 287 00:14:52,880 --> 00:14:55,400 Speaker 3: in which case, you know, bondholders can sort of step 288 00:14:55,440 --> 00:14:58,640 Speaker 3: in and demand the sort of explanation and remedial action 289 00:14:59,360 --> 00:15:02,120 Speaker 3: they're they're not put the heading away from default levels, 290 00:15:02,120 --> 00:15:03,960 Speaker 3: so we're not at that sort of extreme point yet. 291 00:15:04,000 --> 00:15:06,200 Speaker 3: But when they do release that was six months ago, 292 00:15:06,200 --> 00:15:09,400 Speaker 3: when they do release the latest results with this annual 293 00:15:09,480 --> 00:15:12,360 Speaker 3: report to you by the fifteenth of July, you know, I 294 00:15:12,400 --> 00:15:16,680 Speaker 3: expect to see further pressure on those ratios because inflation 295 00:15:16,760 --> 00:15:19,080 Speaker 3: has still been rising, that gap between RBI and CPI 296 00:15:19,120 --> 00:15:21,960 Speaker 3: has increased even further. So we're really waiting to see 297 00:15:22,000 --> 00:15:24,360 Speaker 3: where they are and if they are breaching any trigger 298 00:15:24,360 --> 00:15:27,920 Speaker 3: covenment levels or on a fully of bases, in which case, 299 00:15:28,400 --> 00:15:31,320 Speaker 3: without the equity injection, the regulator would be fully entitled 300 00:15:31,520 --> 00:15:32,680 Speaker 3: to put them into an sa R. 301 00:15:33,360 --> 00:15:39,880 Speaker 1: So it's basically a privatization. The new owners leathered up 302 00:15:40,360 --> 00:15:42,480 Speaker 1: a lot of floating rate, a lot of inflation linked 303 00:15:42,760 --> 00:15:46,880 Speaker 1: as you say, they pay themselves dividends. They kind of 304 00:15:46,960 --> 00:15:49,360 Speaker 1: ran this thing into the ground and walk off and 305 00:15:49,440 --> 00:15:53,400 Speaker 1: the government steps in. I mean, what's the big lesson Hippaul. 306 00:15:53,840 --> 00:15:56,200 Speaker 3: Also, the privatization happen a long time ago. In terms 307 00:15:56,240 --> 00:15:58,200 Speaker 3: has been running with very high gearing for a long 308 00:15:58,240 --> 00:16:00,880 Speaker 3: time and they did story. The shareholders haven't actually taken 309 00:16:00,920 --> 00:16:03,440 Speaker 3: dividends out of the company for around six years, so 310 00:16:03,600 --> 00:16:05,760 Speaker 3: for them it's not being a particularly great investment. Recently. 311 00:16:05,800 --> 00:16:07,720 Speaker 3: The Thames does of a very high one of the 312 00:16:07,800 --> 00:16:11,880 Speaker 3: highest sort of capital expenditures. Is the largest water company UK. 313 00:16:12,000 --> 00:16:13,440 Speaker 3: As you say, it serves as sort of you know, 314 00:16:13,520 --> 00:16:16,960 Speaker 3: Thames Valley London area, So there's some pretty complicated old 315 00:16:17,040 --> 00:16:19,320 Speaker 3: Victorian pipes and sewers they have to deal with. They're 316 00:16:19,360 --> 00:16:21,840 Speaker 3: building a big super sewer along the Thames to try 317 00:16:21,880 --> 00:16:24,160 Speaker 3: and alleviate some of those pressures. But it's certainly been 318 00:16:24,200 --> 00:16:27,280 Speaker 3: a very challenging environment for Thames Water and the shell 319 00:16:27,320 --> 00:16:30,400 Speaker 3: holders I say, haven't taken dividends and they've put another 320 00:16:30,680 --> 00:16:32,640 Speaker 3: five hundred million in in March. They've been asked now 321 00:16:32,720 --> 00:16:34,400 Speaker 3: to put another billion in. Whether they do or not, 322 00:16:34,440 --> 00:16:38,200 Speaker 3: we'll have to see. But yeah, certainly, Yeah, the SAI 323 00:16:38,320 --> 00:16:39,920 Speaker 3: is it is not quite a nationalization. I mean, what 324 00:16:39,920 --> 00:16:42,160 Speaker 3: it would be is that the regulator would be looking 325 00:16:42,200 --> 00:16:45,080 Speaker 3: for a new buyer to transfer the business to and 326 00:16:45,120 --> 00:16:47,400 Speaker 3: they would be obliged to accept the best off another 327 00:16:47,520 --> 00:16:50,520 Speaker 3: market offer, or any reasonable offer. But they would do 328 00:16:50,600 --> 00:16:52,760 Speaker 3: to be obliged to accept the best offer. And of 329 00:16:52,760 --> 00:16:55,440 Speaker 3: course that may well mean if the alternative is insolvent 330 00:16:55,520 --> 00:16:57,680 Speaker 3: to your nationalization, that could mean as sort of the 331 00:16:57,720 --> 00:17:01,560 Speaker 3: ecuyholder's getting zeroed and the bonds taking or or all 332 00:17:01,600 --> 00:17:04,960 Speaker 3: the debt possibly taking quite a significant haircut. You know, 333 00:17:05,000 --> 00:17:07,360 Speaker 3: are very broad to a rule of thumb. We looked 334 00:17:07,359 --> 00:17:09,240 Speaker 3: at if a new owner wanted to take this company 335 00:17:09,240 --> 00:17:11,600 Speaker 3: on at sixty percent gearing and said the current eighty percent, 336 00:17:12,240 --> 00:17:14,000 Speaker 3: it would have to write into total amount of debt 337 00:17:14,000 --> 00:17:16,119 Speaker 3: down by twenty five percent, and that would be, you know, 338 00:17:16,240 --> 00:17:18,160 Speaker 3: a worst case scenario. But it just sort of shows 339 00:17:18,240 --> 00:17:21,200 Speaker 3: extent of the risk facing the bond holders and certainly 340 00:17:21,240 --> 00:17:24,040 Speaker 3: equity holders. And the equity holders now face to the dilemma, 341 00:17:24,160 --> 00:17:26,200 Speaker 3: do we put another billion in? Is that enough to 342 00:17:26,400 --> 00:17:29,200 Speaker 3: keep it going? Is that enough to provide enough liquidity 343 00:17:29,440 --> 00:17:31,080 Speaker 3: and repay the debt that they've got due? I think 344 00:17:31,080 --> 00:17:33,280 Speaker 3: one point eight billion to debt next due next year, 345 00:17:33,440 --> 00:17:35,800 Speaker 3: next year, in twenty twenty four. Is that going to 346 00:17:35,840 --> 00:17:38,400 Speaker 3: be enough for this to survive as a going concern 347 00:17:38,440 --> 00:17:40,200 Speaker 3: and then in the long run turn it around and 348 00:17:40,320 --> 00:17:42,679 Speaker 3: have to get the dividends back in the future. I mean, 349 00:17:42,720 --> 00:17:45,280 Speaker 3: it's a very long game. That the water business is 350 00:17:45,359 --> 00:17:48,760 Speaker 3: is strong, it's stable, so they can take a very 351 00:17:48,760 --> 00:17:50,600 Speaker 3: long term view here and then may see, this is 352 00:17:50,600 --> 00:17:53,480 Speaker 3: the short term pressure and another billion isn't really a problem, 353 00:17:53,520 --> 00:17:55,680 Speaker 3: but it really is going to hinge on whether it 354 00:17:55,800 --> 00:17:56,840 Speaker 3: get that extra capital. 355 00:17:57,400 --> 00:17:59,680 Speaker 1: And some of the bonds were they not protected by 356 00:17:59,680 --> 00:18:02,200 Speaker 1: some going clause that if there was nationalization, they'd get 357 00:18:02,280 --> 00:18:02,800 Speaker 1: made whole. 358 00:18:03,240 --> 00:18:06,640 Speaker 3: I believe there were some some private placements that were 359 00:18:06,640 --> 00:18:09,040 Speaker 3: made during the time when the Labor Party under Jeremy 360 00:18:09,040 --> 00:18:11,680 Speaker 3: Corbyn were talking about nationalizing the water industry. I think 361 00:18:11,800 --> 00:18:15,440 Speaker 3: when they issued some bonds at that particular time, investors 362 00:18:15,480 --> 00:18:17,520 Speaker 3: were concerned and so they put the covenant in saying 363 00:18:17,520 --> 00:18:19,880 Speaker 3: that the nationalization would be able to like a change 364 00:18:19,880 --> 00:18:21,919 Speaker 3: of control, if you like, you to learn some maximization 365 00:18:22,040 --> 00:18:24,320 Speaker 3: be able to investors could put them back at part 366 00:18:24,359 --> 00:18:26,159 Speaker 3: that doesn't apply to most of the bonds. They have 367 00:18:26,280 --> 00:18:28,560 Speaker 3: live in existence for a lot longer than that, and 368 00:18:28,600 --> 00:18:30,800 Speaker 3: the ones issue more recently, they's not seen the problem 369 00:18:30,800 --> 00:18:34,040 Speaker 3: because obviously that that sort of pressure has gone away. 370 00:18:34,280 --> 00:18:36,639 Speaker 3: And say an s AI isn't the nationalization. It's a 371 00:18:36,680 --> 00:18:40,879 Speaker 3: different things. It's where it's put into a special regime 372 00:18:41,000 --> 00:18:43,680 Speaker 3: in order to transfer the access to a new private 373 00:18:43,720 --> 00:18:46,880 Speaker 3: buyer who would take it on, presumably at a sort 374 00:18:46,920 --> 00:18:49,840 Speaker 3: of bargain basement price, a discount to bar or zero 375 00:18:49,960 --> 00:18:53,119 Speaker 3: prevalue and try and turn it around. The last is 376 00:18:53,119 --> 00:18:55,040 Speaker 3: aught they couldn't find a buyer, then the last resort 377 00:18:55,040 --> 00:18:58,239 Speaker 3: would alms have to be in nationalization. And yeah, some 378 00:18:58,280 --> 00:19:01,879 Speaker 3: of those bonds could under those circumstance could trigger those clauses. 379 00:19:01,880 --> 00:19:04,879 Speaker 3: But there are really any applies to few private placements, 380 00:19:04,880 --> 00:19:06,760 Speaker 3: not the vast majority of their public debt. 381 00:19:07,240 --> 00:19:10,880 Speaker 1: What's your base case now, Paul? Can they avoid special administration? 382 00:19:13,080 --> 00:19:14,800 Speaker 3: Can they avoid it? Well, only if they get this 383 00:19:16,119 --> 00:19:19,680 Speaker 3: capital injection from those shareholders in my opinion, As I said, 384 00:19:19,680 --> 00:19:22,320 Speaker 3: press reports were favorable on that over the weekend. There's 385 00:19:22,320 --> 00:19:27,000 Speaker 3: some very large long term sort of infrastructure funds, some 386 00:19:28,720 --> 00:19:31,920 Speaker 3: pension funds in there, some sovereign wealth funds. So there's 387 00:19:31,920 --> 00:19:35,600 Speaker 3: certainly some deep pocketed shareholders who could take a very 388 00:19:35,600 --> 00:19:37,600 Speaker 3: long term view on us and say, yeah, we do 389 00:19:37,640 --> 00:19:40,760 Speaker 3: still like the sector. There is another regulatory review coming 390 00:19:40,840 --> 00:19:43,280 Speaker 3: up in twenty twenty five when maybe some of these 391 00:19:43,280 --> 00:19:45,439 Speaker 3: problems could be resolved and we still have faith in 392 00:19:45,440 --> 00:19:48,480 Speaker 3: the sort of the UK water system as it spans. 393 00:19:48,480 --> 00:19:51,120 Speaker 3: So yeah, we will have to hope for that extra rebellion. 394 00:19:51,600 --> 00:19:53,639 Speaker 3: As I say, that should be the news on that 395 00:19:53,680 --> 00:19:56,680 Speaker 3: certainly should be coming with the annual report. But short 396 00:19:56,680 --> 00:19:58,679 Speaker 3: of that, then they really they have plenty of they 397 00:19:58,720 --> 00:20:02,520 Speaker 3: say liquidity, as are therefore liquidity. Whether they can draw 398 00:20:02,600 --> 00:20:05,760 Speaker 3: all on that, all of that down is debatable because 399 00:20:05,800 --> 00:20:07,919 Speaker 3: they have some other covenant that restrict the amount of 400 00:20:08,320 --> 00:20:10,760 Speaker 3: debt maturities they can have over over the twenty four 401 00:20:10,800 --> 00:20:14,360 Speaker 3: month period. So yeah, they certainly have they say they 402 00:20:14,359 --> 00:20:16,959 Speaker 3: have it a sufficient liquidity back. Certainly that billion capital 403 00:20:17,080 --> 00:20:20,040 Speaker 3: is required to shore up the balance. You probably bring 404 00:20:20,080 --> 00:20:23,120 Speaker 3: gearing down from about eighty to around seventy five percent. 405 00:20:23,480 --> 00:20:26,359 Speaker 3: It would alleviate any sort of the liquidity the debt 406 00:20:26,840 --> 00:20:30,160 Speaker 3: problems that they had. It wouldn't immediately solve their sort 407 00:20:30,200 --> 00:20:32,239 Speaker 3: of low interest cover problems, but I mean as they 408 00:20:32,480 --> 00:20:35,880 Speaker 3: redeem debt, hopefully with some of that cash, it should 409 00:20:35,920 --> 00:20:38,680 Speaker 3: ensure they shouldn't breach their trigger levels at least. But 410 00:20:38,720 --> 00:20:41,480 Speaker 3: that's certainly what's needed. I think the regulator, the off 411 00:20:41,480 --> 00:20:43,960 Speaker 3: what rather, was in front of Parliament a day or 412 00:20:44,000 --> 00:20:46,080 Speaker 3: two ago saying they may well need more than a billion. 413 00:20:46,320 --> 00:20:48,040 Speaker 3: That was their view. So we'd have to see what's 414 00:20:48,040 --> 00:20:50,040 Speaker 3: going to be forthcoming. But that really is the only 415 00:20:50,080 --> 00:20:51,480 Speaker 3: way I think they can avoid an. 416 00:20:51,440 --> 00:20:55,240 Speaker 1: Essayar If I'm a debt investor sitting anywhere, not just 417 00:20:55,320 --> 00:20:57,040 Speaker 1: in the UK, but you know, anywhere in the world, 418 00:20:57,080 --> 00:21:00,240 Speaker 1: then thinking about conservative long term you know, maybe not 419 00:21:00,280 --> 00:21:02,760 Speaker 1: massive returns, but they should be stable. I'm going to 420 00:21:02,760 --> 00:21:04,679 Speaker 1: think about utilities. I'm going to think, you know, possibly 421 00:21:04,720 --> 00:21:08,480 Speaker 1: about water because everyone needs it. What are the takeaways 422 00:21:08,640 --> 00:21:13,200 Speaker 1: from this situation for the broader sector, you know, not 423 00:21:13,240 --> 00:21:15,080 Speaker 1: just in the UK, but I mean, are there any 424 00:21:15,080 --> 00:21:18,280 Speaker 1: other other bigger takeaways for utilities in general? 425 00:21:18,680 --> 00:21:21,240 Speaker 3: I think this is isolated to the UK water sector. 426 00:21:21,359 --> 00:21:26,280 Speaker 3: It's really down to it's the mismatch between the CPI 427 00:21:26,560 --> 00:21:29,439 Speaker 3: h link revenues which are much lower and the RPI 428 00:21:29,640 --> 00:21:33,280 Speaker 3: linked costs that they have, and that gap is creating 429 00:21:33,320 --> 00:21:35,919 Speaker 3: pressure on the financial position in the UK water sector, 430 00:21:36,040 --> 00:21:38,560 Speaker 3: but doesn't apply to other regulated sectors in the UK 431 00:21:38,640 --> 00:21:40,800 Speaker 3: which are maybe still out the eye base and don't 432 00:21:40,800 --> 00:21:43,440 Speaker 3: have the same sort of levels of gearing as Thames 433 00:21:43,520 --> 00:21:46,800 Speaker 3: Water for example. So in my view, it's certainly restricted 434 00:21:46,800 --> 00:21:49,040 Speaker 3: to the UK water sector. But that's quite a big sector. 435 00:21:49,040 --> 00:21:51,920 Speaker 3: I mean, there's around sixty billion pounds worth of debt 436 00:21:51,960 --> 00:21:54,600 Speaker 3: in the sector that's bond and bank debt, so I 437 00:21:54,640 --> 00:21:57,080 Speaker 3: mean it's a big sector. I mean it's around eight 438 00:21:57,160 --> 00:21:59,920 Speaker 3: or ten percent of the sort of European pan europe 439 00:22:00,119 --> 00:22:03,359 Speaker 3: in Utilities index, So it's enough to make it and 440 00:22:03,400 --> 00:22:06,199 Speaker 3: make it a difference and to have ripple effects across 441 00:22:06,200 --> 00:22:10,600 Speaker 3: the broader sector and markets and disturb components and what's 442 00:22:11,000 --> 00:22:14,000 Speaker 3: otherwise strong sector. If you look at other European utilities 443 00:22:14,040 --> 00:22:17,720 Speaker 3: now the energy crisis is over, they're doing very well. 444 00:22:17,960 --> 00:22:20,439 Speaker 3: And really this is a sort of an isolated event. 445 00:22:21,200 --> 00:22:23,560 Speaker 3: It might not be isolated. Just as Thames Water, we 446 00:22:23,640 --> 00:22:26,440 Speaker 3: didn't analysis looking at other companies that may be susceptible 447 00:22:26,480 --> 00:22:30,000 Speaker 3: as well, looking at companies with particularly high gearing or 448 00:22:30,200 --> 00:22:33,360 Speaker 3: very high proportion of RPI link debt or very low 449 00:22:33,440 --> 00:22:39,320 Speaker 3: interest coverage. Companies like Affinity, Welsh Water, Angli and Southern 450 00:22:39,359 --> 00:22:42,040 Speaker 3: certainly raise a few red flags in that respect. That's 451 00:22:42,080 --> 00:22:43,520 Speaker 3: not to say they're going to get dragged into it, 452 00:22:43,600 --> 00:22:45,600 Speaker 3: but I think if anyone else is at risk of 453 00:22:45,600 --> 00:22:48,720 Speaker 3: getting dragged into this sort of CPI RPI mismatch, it 454 00:22:48,880 --> 00:22:52,760 Speaker 3: could be companies like that that have sort of stressed 455 00:22:52,760 --> 00:22:55,879 Speaker 3: financial positions. Should we say, But again Thames is almost 456 00:22:56,400 --> 00:22:59,480 Speaker 3: a nice unique event, a unique company, and that it 457 00:22:59,560 --> 00:23:02,440 Speaker 3: had the just high scheering eighty percent the average is 458 00:23:02,440 --> 00:23:05,680 Speaker 3: around sixty five. That's very low interest coverage, quite a 459 00:23:05,760 --> 00:23:08,520 Speaker 3: high proportion of RPR linked and a poor operational performance. 460 00:23:08,520 --> 00:23:10,320 Speaker 3: And you combine all those things and end up where 461 00:23:10,320 --> 00:23:12,520 Speaker 3: we are. I don't think any other company is quite 462 00:23:12,560 --> 00:23:14,840 Speaker 3: in the same position, so read across at the minute 463 00:23:14,880 --> 00:23:17,080 Speaker 3: is limited to Terams, but as you've seen another company's 464 00:23:17,119 --> 00:23:19,600 Speaker 3: bond at the water company sector bond, they have the 465 00:23:19,640 --> 00:23:22,879 Speaker 3: spreads have widened, yields of risen because of the increased 466 00:23:22,960 --> 00:23:24,840 Speaker 3: risk that people are assigning to them. 467 00:23:25,400 --> 00:23:28,040 Speaker 1: Thanks very much, Paul Vickers of Bloomberg Intelligence. You can 468 00:23:28,080 --> 00:23:30,640 Speaker 1: read all of this great analysis on the Bloomberg Terminal. 469 00:23:30,840 --> 00:23:32,400 Speaker 1: Do check it out and hope to see you back 470 00:23:32,400 --> 00:23:32,960 Speaker 1: on the show soon. 471 00:23:33,000 --> 00:23:34,280 Speaker 3: Paul, Yeah, look forward to it. 472 00:23:34,440 --> 00:23:38,240 Speaker 1: Thanks James, and thanks again to Carmen Arroyo from Bloomberg News. 473 00:23:38,280 --> 00:23:40,560 Speaker 1: Read all of her great structured finance scoops on the 474 00:23:40,640 --> 00:23:44,840 Speaker 1: terminal and at Bloomberg dot Com. Thanks James, I'm James Crumbie. 475 00:23:44,880 --> 00:23:47,160 Speaker 1: It's been a pleasure having you join us again next 476 00:23:47,200 --> 00:24:06,080 Speaker 1: week on the Credit Edge.