Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast.
Speaker 1: My name is James Crombie. I'm a senior editor at Bloomberg.
Speaker 1: This week, we're very pleased to have on the show
Speaker 1: Carmen Arroyo, who covers structured markets for Bloomberg News in
Speaker 1: New York. How are you, Carmen, I'm good.
Speaker 2: Thank you for having me, James.
Speaker 1: We're also delighted to welcome back Paul Vickers, who covers
Speaker 1: utilities for Bloomberg Intelligence in London. Hello, Paul, James. We'll
Speaker 1: be coming back to Paul to talk about Thames Water,
Speaker 1: the UK utility that's blowing up and dragging the whole
Speaker 1: sector down. So do stay with us. But first, Carmen
Speaker 1: Arroyo with Bloomberg News, what's the big story now with
Speaker 1: asset backed securities?
Speaker 2: Sure, well, thank you so much for having me. But
Speaker 2: let's talk a little bit about asset backed securities. As
Speaker 2: you said, sip back securities are basically bonds that repackage
Speaker 2: any type of consumer dead and they're typically very safe
Speaker 2: and investors love them. The problem right now is that
Speaker 2: the dead that they repackage, which is given to consumers,
Speaker 2: is got getting a little bit more hairy. Consumers are
Speaker 2: basically running out of pandemic savings, so they're falling back
Speaker 2: on their payments, and some of the loans they took out,
Speaker 2: they're just not paying them back, which is impacting the
Speaker 2: bonds that are or this impacting the bonds that are
Speaker 2: associated with those loans. And that's specially true in the
Speaker 2: subprem autos sector.
Speaker 1: So let's just break that down a little bit for
Speaker 1: those people who don't know this stuff. Asset backed securities.
Speaker 1: I mean, you know, David Bowie once got a big
Speaker 1: loan from repackaging revenue from future music sales. Then streaming
Speaker 1: came along, so that didn't work out so well for investors,
Speaker 1: but he did get the money. And then in two
Speaker 1: thousand and eight the global financial crisis, structured finance ced.
Speaker 1: All these structured products were responsible for the implosion of
Speaker 1: the global financial system. What about for cars car loans?
Speaker 1: How does this all work?
Speaker 2: Yeah? Sure, so how it works is basically, if you're
Speaker 2: like a subprime model lender, you're basically a company that
Speaker 2: gives out loans to consumers that need a loan for
Speaker 2: a car. Right, So, in order to get more capital in,
Speaker 2: what you do is you put all those loans together
Speaker 2: and you sell them as a bond to investors in
Speaker 2: Wall Street, and then that way you can access like
Speaker 2: cheap financing. That's usually how it works. It's just putting
Speaker 2: together a bunch of different loans and then repackage them
Speaker 2: as a bond. So it's basically like financial engineering, like
Speaker 2: it's a secondary market for the debt. Does that make sense?
Speaker 1: Yeah, that's good, But so then why are we talking
Speaker 1: about them now? What's the big deal with abs and
Speaker 1: why in particular in the car sector.
Speaker 2: Sure, So, this shit that's happening in the auto abs
Speaker 2: world is that consumers are increasingly not paying back their
Speaker 2: auto loans. And that's usually fine, but it's not fine
Speaker 2: for bonds associated with two specific lenders. Those are American
Speaker 2: Car Center and US Auto Sales. Those two subprime lenders
Speaker 2: basically close down their dealerships and close down their businesses
Speaker 2: like a few months ago, So consumers that had loans
Speaker 2: with them are no longer paying them back and that's
Speaker 2: becoming an issue for Wall Street. There are bondholders out
Speaker 2: there that own the riskiest trenches of those bonds that
Speaker 2: are associated with those loans, and they're starting to get
Speaker 2: worried because the borrowers are defaulting a lot on their debt.
Speaker 2: So the issue there is that if they fought, if
Speaker 2: a critical mass of borrowers stopping back their dead, they
Speaker 2: could take losses on the bonds. And that's basically never
Speaker 2: happened in auto bonds. Just a couple times in the
Speaker 2: nineties and it was like really really different scenario. So
Speaker 2: Wall Street is starting to get worried about how like
Speaker 2: consumers are paying back their debt or not within the
Speaker 2: auto sector.
Speaker 1: Why is it so unusual to see losses here, Well.
Speaker 2: It's very unusual because the way this bonds work is
Speaker 2: that you put up a lot of collateral I meaning
Speaker 2: you put up a lot more loans than you expect
Speaker 2: them to default. So when that one loan defaults, you
Speaker 2: take it out of the basket. But right now so
Speaker 2: many loans are defaulting that there's just not enough protection
Speaker 2: for investors. So these like the borrowers are like the
Speaker 2: bond holders of those risky ast trenches, stand to take
Speaker 2: losses if borers keep defaulting at the same rate, and
Speaker 2: that's we're almost there, basically, and that would be a
Speaker 2: really big deal for the audubon market because it's just
Speaker 2: never happened before in the public audubon space, like subprime. Yes,
Speaker 2: so it's it's it's supprime. It's not prime dead, so
Speaker 2: it's prime. It's dead given out to kind of like
Speaker 2: the riskiest borrowers, like people that have like maybe lower
Speaker 2: FICO scores or that have like maybe don't have W two.
Speaker 2: So it just depends. But it's usually like bor wars
Speaker 2: that have like lower credit scores or lower capability of
Speaker 2: paying it back.
Speaker 1: But by subprime, I mean, you know, the last time
Speaker 1: I heard subprime defaults on this scale, it was two
Speaker 1: thousand and eight and the whole housing market was falling
Speaker 1: apart and that led to a catastrophe. We talk about
Speaker 1: the same same scale here.
Speaker 2: It's not the same scale though. First of all, like
Speaker 2: other loans are much shorter in nature, so they're also
Speaker 2: like the loan sizes are smaller. It's not like if
Speaker 2: you have a mortgage, like a mortgage is almost in
Speaker 2: the US, a mortgage can be like a thirty year product,
Speaker 2: so you're really tied to that as a borrower, but
Speaker 2: like auto loans can be like five years, can be
Speaker 2: three years, so you can kind of pay it back.
Speaker 2: So it's not the same scale at all, And in
Speaker 2: this case in subprime auto bones, it's just this is
Speaker 2: happening subprime auto bones defaulting. It's just happening with some
Speaker 2: lenders that were particularly tailored to risky borrowers. So it's
Speaker 2: not happening across the space yet.
Speaker 1: And some investors are going to take a loss. How
Speaker 1: much are they going to lose? They're going to get
Speaker 1: wiped out, They.
Speaker 2: Could get they could potentially get wiped out. We just
Speaker 2: have to see how those defaults evolve. So if if
Speaker 2: a critical mass actually defaults, yes, they could stand to
Speaker 2: lose almost everything on those bonds, like they would take
Speaker 2: losses on the principle, not on the interest, which is
Speaker 2: a pretty big deal. But we we still have to see.
Speaker 2: We're not there yet.
Speaker 1: So some investors, you know, large investors, presumably institutional guys,
Speaker 1: they took some risk. Now they take some losses. Who cares?
Speaker 1: I mean, is there a bigger impact from this? I mean,
Speaker 1: is there a ripple effect that that rips through the
Speaker 1: entire structure finance market? Is there something that's going to
Speaker 1: blow up here? Do you think so?
Speaker 2: One of them One of the bigger takeaways of this
Speaker 2: is just like this, this subprime lenders. Auto lenders kind
Speaker 2: of like started relying a lot on the ASCID backed
Speaker 2: securities market to get liquidity, and they issued like their
Speaker 2: issuance went up by a lot in the past five years.
Speaker 2: So kind of the takeaway is that if investors start
Speaker 2: losing faith on these kind of bonds, how are these
Speaker 2: lenders going to get financing? And do we expect to
Speaker 2: see more of these slenders go bankrupt?
Speaker 1: And then sort of underlying it though, I mean, is
Speaker 1: this just really a story about the US consumer? Is
Speaker 1: that where the pressure is coming from.
Speaker 2: Yeah, that's correct, And it goes back to the same thing, right, like,
Speaker 2: if there's fewer subprime lenders out there available to give
Speaker 2: credit to consumers, where a consumers going to get financing
Speaker 2: for their needs, They're just going to be squeezed out
Speaker 2: of the market.
Speaker 1: And those subprime consumers that we're talking about, they depend
Speaker 1: on a car in lots of cases for their livelihood.
Speaker 1: They need it to get to work. It's the last
Speaker 1: thing they'll give up, you know, before that. You know,
Speaker 1: maybe housing is the last bit, but the car is
Speaker 1: next to the last. Does it imply some kind of
Speaker 1: desperation on the palf of the American consumers.
Speaker 2: It's definitely showing that there's a portion of American consumers
Speaker 2: that can not would stand this current rates, current rate environment,
Speaker 2: and they're just running out of pandemic savings and if
Speaker 2: they can't get liquidity from you know, their credit cards,
Speaker 2: so they're auto dead. Where are they going to go?
Speaker 2: So it definitely signals that the economy is turning.
Speaker 1: Is there any regional pattern to this? Are there parts
Speaker 1: of the country that are doing better or worse?
Speaker 2: As far as we know, so the lenders that have
Speaker 2: gone bust, we're mostly and more in the South and
Speaker 2: in the north of the US, But it's broadly speaking,
Speaker 2: it's happening and across the country.
Speaker 1: So just going back to the financial engineering aspect, you
Speaker 1: mentioned that that term always really worries me. You know,
Speaker 1: the most complex, least transparent markets are often where trouble starts.
Speaker 1: You know, how worried should we be about structured finance
Speaker 1: right now? Are we expecting this to lead to another
Speaker 1: financial crisis?
Speaker 2: I don't think it's going to be a broad financial crisis.
Speaker 2: I think we're going to see it more like kind
Speaker 2: of like more pockets of the market go bad. So
Speaker 2: just like for instance, in the Audobonne space, it's subprime
Speaker 2: auto and it's specific lenders, and I think that's going
Speaker 2: to basically happen across everything that's structured. It's just like
Speaker 2: specific pockets, specific companies that are that cannot withstand the
Speaker 2: current rate environment, and that kind of grew a lot
Speaker 2: when rates were really row.
Speaker 1: And the rates on these things. A lot of it's
Speaker 1: floating rate, right, so it just as base rates rise.
Speaker 2: Yeah, it really depends, for instance, like mortgages are mostly fixed,
Speaker 2: Like it really depends on what product we're talking about.
Speaker 2: But yes, it like you're just seeing more consumers struggle
Speaker 2: with how much they have to pay on their debt.
Speaker 1: So before we talk to Pull Vickers at Bloomberg Intelligence,
Speaker 1: what's the next big thing we should be watching here?
Speaker 1: Common more downgrades, more losses, more distress.
Speaker 2: Yeah, that's basically we should be watching for which subprime
Speaker 2: lender is going to struggle next basically? And were are
Speaker 2: they going to go for liquidity if they can't go
Speaker 2: to the bond market, are they going to go to
Speaker 2: private credit? Are they going to go to distressed buyers? Like,
Speaker 2: what's the next step for them?
Speaker 1: Great stuff? Karaman from Bloomberg News Thank you so much
Speaker 1: for joining us. Read all of Carmen's scoops on the
Speaker 1: Bloomberg terminal and of course at Bloomberg dot com. So,
Speaker 1: as I mentioned earlier, there's a crisis in the UK
Speaker 1: water sector and we're very pleased to have with us
Speaker 1: Paul Vickers, who covers utilities for Bloomberg Intelligence based in London.
Speaker 1: How's it going, Paul James?
Speaker 3: Hi, we'll go here Banks.
Speaker 1: Great So Thames Water. It's the UK's biggest water provider.
Speaker 1: They polluted the rivers and they're being investigated by regulators
Speaker 1: and they're at risk of being nationalized because they can't
Speaker 1: pay back eighteen billion dollars equivalent in debt. Things are evolving.
Speaker 1: We're talking on July fifth. But what's the situation today, Paul.
Speaker 1: The bonds have dropped again. What's the latest.
Speaker 3: Well, the bonds are certainly jumping around quite a lot.
Speaker 3: I mean, if we don't usually get this volatility in
Speaker 3: water barns, it should be very stable and stable regime.
Speaker 3: But waiting for Thames Water to release their annual report,
Speaker 3: which is due by the fifteenth of June. That should
Speaker 3: give a lot more information. We're also waiting for us
Speaker 3: to see if they can get another billion pounds from
Speaker 3: their shareholders who have stump to up around half a
Speaker 3: billion only in March of this year. They probably need
Speaker 3: that other billion that they had here marching their business plan,
Speaker 3: the eight year business plan from the launch in twenty
Speaker 3: twenty one. Of course the CEO is resigned syntense, maybe
Speaker 3: that business plan is maybe not so valid anymore, but
Speaker 3: certainly they need to get that money from shareholders and
Speaker 3: press reports at the weekend we're encouraging in that respect,
Speaker 3: but they certainly need that otherwise they are at risk
Speaker 3: of getting put into what's called special Administration Regime regime
Speaker 3: or SAAR, which as you mentioned, is a sort of
Speaker 3: it's a form of there's an alternative to insolvent if you like,
Speaker 3: imposed by the regulator on essential services like energy and
Speaker 3: water to ensure that these companies can keep providing the
Speaker 3: services to essential services to the customers while a new
Speaker 3: buyer is found. And this is the last time we
Speaker 3: saw this was Bold Energy during the energy crisis, and
Speaker 3: you can getting transferred to Octopus Energy. So we have
Speaker 3: one example of this happening. You know, obviously bondholders and
Speaker 3: everyone termes of work, I'm sure I hopes we can
Speaker 3: avoid the second one, but I think for that to happen,
Speaker 3: it is going to need quite a considerable cash injection
Speaker 3: from existing shareholders, and hopefully will have that. I assume
Speaker 3: the news may come with any report on the fifteenth
Speaker 3: of June, which is the regulatory deadline, at least with
Speaker 3: the anual report. So we go, we're keeping it on
Speaker 3: the news until then.
Speaker 1: As you say, Paul, the water is a very stable business.
Speaker 1: What's the history though? How did it get into so
Speaker 1: much trouble?
Speaker 3: Well, yeah, terms does have the highest gearing in a sect,
Speaker 3: as you say that, they've got about fourteen billion pounds
Speaker 3: worth of debt eighteen billion dollars as you say, but
Speaker 3: this amounts around eighty percent of the sort of regulatory
Speaker 3: capital value, and that's above what of what caees is
Speaker 3: sort of acceptable level of sixty percent. That's a level
Speaker 3: that it it has set its sort of regulatory formula
Speaker 3: on and remunerates companies accordingly. So it cont a free
Speaker 3: this they're gearing above the sixty percent hide life and
Speaker 3: Thames has been an eighty percent for many years and
Speaker 3: plans to stay there for many more. But of course, yeah,
Speaker 3: this increases the risk and the return profile you know
Speaker 3: for shareholders. But obviously the risk side of that has
Speaker 3: been exposed by larger well AA and a poor operational performance.
Speaker 3: You say that they they've got a poor rep track
Speaker 3: record on more water leakage and sewer leakage. They've been
Speaker 3: fined for that customer service, that their operation record isn't good.
Speaker 3: But the bigger problem really is sort of financial pressure
Speaker 3: there under and all of that arises from the spike
Speaker 3: inflation which we've seen over the last year or so
Speaker 3: in the UK. Yeah, this has a number of effects
Speaker 3: on Thames Water and really it's the factor that it's
Speaker 3: putting them under financial pressure and if their regulators see
Speaker 3: deems they might be unlikely to be able to pay
Speaker 3: their debts, and that's a subjective due from the regulator,
Speaker 3: they can put them into an SAAR. And all the
Speaker 3: evidence and points to the fact that they are certainly
Speaker 3: getting very very tight against the sort of interest cover ratishops.
Speaker 3: I mean, what's happening is, you know, earnings are decreasing,
Speaker 3: is the cost to replace pipes and pay their staff
Speaker 3: are increasing a lot faster than their revenues. It's sort
Speaker 3: of increasing interest costs on their debt fifty eight percent,
Speaker 3: which is linked to RPI, and also any on any
Speaker 3: new debt issue in the market. Has also seen that
Speaker 3: the fair value of the index link which increases with inflation,
Speaker 3: and that's rising fast, and the regulatory caple value, So
Speaker 3: all of these things that are coming into play. Particular
Speaker 3: is RPI has moved well above CPI, which is what
Speaker 3: their revenues are based on. The gaps now around four percent,
Speaker 3: so the costs are rising four percent faster than the
Speaker 3: revenues are increasing at the same time, so actually say
Speaker 3: reducing earning, it's reducing interest cover, it's increasing gearing is
Speaker 3: putting a lot of pressure on those and almost covenant levels,
Speaker 3: and the last time they re bought with them in September,
Speaker 3: they're getting close to what we call a trigger covenant level,
Speaker 3: in which case, you know, bondholders can sort of step
Speaker 3: in and demand the sort of explanation and remedial action
Speaker 3: they're they're not put the heading away from default levels,
Speaker 3: so we're not at that sort of extreme point yet.
Speaker 3: But when they do release that was six months ago,
Speaker 3: when they do release the latest results with this annual
Speaker 3: report to you by the fifteenth of July, you know, I
Speaker 3: expect to see further pressure on those ratios because inflation
Speaker 3: has still been rising, that gap between RBI and CPI
Speaker 3: has increased even further. So we're really waiting to see
Speaker 3: where they are and if they are breaching any trigger
Speaker 3: covenment levels or on a fully of bases, in which case,
Speaker 3: without the equity injection, the regulator would be fully entitled
Speaker 3: to put them into an sa R.
Speaker 1: So it's basically a privatization. The new owners leathered up
Speaker 1: a lot of floating rate, a lot of inflation linked
Speaker 1: as you say, they pay themselves dividends. They kind of
Speaker 1: ran this thing into the ground and walk off and
Speaker 1: the government steps in. I mean, what's the big lesson Hippaul.
Speaker 3: Also, the privatization happen a long time ago. In terms
Speaker 3: has been running with very high gearing for a long
Speaker 3: time and they did story. The shareholders haven't actually taken
Speaker 3: dividends out of the company for around six years, so
Speaker 3: for them it's not being a particularly great investment. Recently.
Speaker 3: The Thames does of a very high one of the
Speaker 3: highest sort of capital expenditures. Is the largest water company UK.
Speaker 3: As you say, it serves as sort of you know,
Speaker 3: Thames Valley London area, So there's some pretty complicated old
Speaker 3: Victorian pipes and sewers they have to deal with. They're
Speaker 3: building a big super sewer along the Thames to try
Speaker 3: and alleviate some of those pressures. But it's certainly been
Speaker 3: a very challenging environment for Thames Water and the shell
Speaker 3: holders I say, haven't taken dividends and they've put another
Speaker 3: five hundred million in in March. They've been asked now
Speaker 3: to put another billion in. Whether they do or not,
Speaker 3: we'll have to see. But yeah, certainly, Yeah, the SAI
Speaker 3: is it is not quite a nationalization. I mean, what
Speaker 3: it would be is that the regulator would be looking
Speaker 3: for a new buyer to transfer the business to and
Speaker 3: they would be obliged to accept the best off another
Speaker 3: market offer, or any reasonable offer. But they would do
Speaker 3: to be obliged to accept the best offer. And of
Speaker 3: course that may well mean if the alternative is insolvent
Speaker 3: to your nationalization, that could mean as sort of the
Speaker 3: ecuyholder's getting zeroed and the bonds taking or or all
Speaker 3: the debt possibly taking quite a significant haircut. You know,
Speaker 3: are very broad to a rule of thumb. We looked
Speaker 3: at if a new owner wanted to take this company
Speaker 3: on at sixty percent gearing and said the current eighty percent,
Speaker 3: it would have to write into total amount of debt
Speaker 3: down by twenty five percent, and that would be, you know,
Speaker 3: a worst case scenario. But it just sort of shows
Speaker 3: extent of the risk facing the bond holders and certainly
Speaker 3: equity holders. And the equity holders now face to the dilemma,
Speaker 3: do we put another billion in? Is that enough to
Speaker 3: keep it going? Is that enough to provide enough liquidity
Speaker 3: and repay the debt that they've got due? I think
Speaker 3: one point eight billion to debt next due next year,
Speaker 3: next year, in twenty twenty four. Is that going to
Speaker 3: be enough for this to survive as a going concern
Speaker 3: and then in the long run turn it around and
Speaker 3: have to get the dividends back in the future. I mean,
Speaker 3: it's a very long game. That the water business is
Speaker 3: is strong, it's stable, so they can take a very
Speaker 3: long term view here and then may see, this is
Speaker 3: the short term pressure and another billion isn't really a problem,
Speaker 3: but it really is going to hinge on whether it
Speaker 3: get that extra capital.
Speaker 1: And some of the bonds were they not protected by
Speaker 1: some going clause that if there was nationalization, they'd get
Speaker 1: made whole.
Speaker 3: I believe there were some some private placements that were
Speaker 3: made during the time when the Labor Party under Jeremy
Speaker 3: Corbyn were talking about nationalizing the water industry. I think
Speaker 3: when they issued some bonds at that particular time, investors
Speaker 3: were concerned and so they put the covenant in saying
Speaker 3: that the nationalization would be able to like a change
Speaker 3: of control, if you like, you to learn some maximization
Speaker 3: be able to investors could put them back at part
Speaker 3: that doesn't apply to most of the bonds. They have
Speaker 3: live in existence for a lot longer than that, and
Speaker 3: the ones issue more recently, they's not seen the problem
Speaker 3: because obviously that that sort of pressure has gone away.
Speaker 3: And say an s AI isn't the nationalization. It's a
Speaker 3: different things. It's where it's put into a special regime
Speaker 3: in order to transfer the access to a new private
Speaker 3: buyer who would take it on, presumably at a sort
Speaker 3: of bargain basement price, a discount to bar or zero
Speaker 3: prevalue and try and turn it around. The last is
Speaker 3: aught they couldn't find a buyer, then the last resort
Speaker 3: would alms have to be in nationalization. And yeah, some
Speaker 3: of those bonds could under those circumstance could trigger those clauses.
Speaker 3: But there are really any applies to few private placements,
Speaker 3: not the vast majority of their public debt.
Speaker 1: What's your base case now, Paul? Can they avoid special administration?
Speaker 3: Can they avoid it? Well, only if they get this
Speaker 3: capital injection from those shareholders in my opinion, As I said,
Speaker 3: press reports were favorable on that over the weekend. There's
Speaker 3: some very large long term sort of infrastructure funds, some
Speaker 3: pension funds in there, some sovereign wealth funds. So there's
Speaker 3: certainly some deep pocketed shareholders who could take a very
Speaker 3: long term view on us and say, yeah, we do
Speaker 3: still like the sector. There is another regulatory review coming
Speaker 3: up in twenty twenty five when maybe some of these
Speaker 3: problems could be resolved and we still have faith in
Speaker 3: the sort of the UK water system as it spans.
Speaker 3: So yeah, we will have to hope for that extra rebellion.
Speaker 3: As I say, that should be the news on that
Speaker 3: certainly should be coming with the annual report. But short
Speaker 3: of that, then they really they have plenty of they
Speaker 3: say liquidity, as are therefore liquidity. Whether they can draw
Speaker 3: all on that, all of that down is debatable because
Speaker 3: they have some other covenant that restrict the amount of
Speaker 3: debt maturities they can have over over the twenty four
Speaker 3: month period. So yeah, they certainly have they say they
Speaker 3: have it a sufficient liquidity back. Certainly that billion capital
Speaker 3: is required to shore up the balance. You probably bring
Speaker 3: gearing down from about eighty to around seventy five percent.
Speaker 3: It would alleviate any sort of the liquidity the debt
Speaker 3: problems that they had. It wouldn't immediately solve their sort
Speaker 3: of low interest cover problems, but I mean as they
Speaker 3: redeem debt, hopefully with some of that cash, it should
Speaker 3: ensure they shouldn't breach their trigger levels at least. But
Speaker 3: that's certainly what's needed. I think the regulator, the off
Speaker 3: what rather, was in front of Parliament a day or
Speaker 3: two ago saying they may well need more than a billion.
Speaker 3: That was their view. So we'd have to see what's
Speaker 3: going to be forthcoming. But that really is the only
Speaker 3: way I think they can avoid an.
Speaker 1: Essayar If I'm a debt investor sitting anywhere, not just
Speaker 1: in the UK, but you know, anywhere in the world,
Speaker 1: then thinking about conservative long term you know, maybe not
Speaker 1: massive returns, but they should be stable. I'm going to
Speaker 1: think about utilities. I'm going to think, you know, possibly
Speaker 1: about water because everyone needs it. What are the takeaways
Speaker 1: from this situation for the broader sector, you know, not
Speaker 1: just in the UK, but I mean, are there any
Speaker 1: other other bigger takeaways for utilities in general?
Speaker 3: I think this is isolated to the UK water sector.
Speaker 3: It's really down to it's the mismatch between the CPI
Speaker 3: h link revenues which are much lower and the RPI
Speaker 3: linked costs that they have, and that gap is creating
Speaker 3: pressure on the financial position in the UK water sector,
Speaker 3: but doesn't apply to other regulated sectors in the UK
Speaker 3: which are maybe still out the eye base and don't
Speaker 3: have the same sort of levels of gearing as Thames
Speaker 3: Water for example. So in my view, it's certainly restricted
Speaker 3: to the UK water sector. But that's quite a big sector.
Speaker 3: I mean, there's around sixty billion pounds worth of debt
Speaker 3: in the sector that's bond and bank debt, so I
Speaker 3: mean it's a big sector. I mean it's around eight
Speaker 3: or ten percent of the sort of European pan europe
Speaker 3: in Utilities index, So it's enough to make it and
Speaker 3: make it a difference and to have ripple effects across
Speaker 3: the broader sector and markets and disturb components and what's
Speaker 3: otherwise strong sector. If you look at other European utilities
Speaker 3: now the energy crisis is over, they're doing very well.
Speaker 3: And really this is a sort of an isolated event.
Speaker 3: It might not be isolated. Just as Thames Water, we
Speaker 3: didn't analysis looking at other companies that may be susceptible
Speaker 3: as well, looking at companies with particularly high gearing or
Speaker 3: very high proportion of RPI link debt or very low
Speaker 3: interest coverage. Companies like Affinity, Welsh Water, Angli and Southern
Speaker 3: certainly raise a few red flags in that respect. That's
Speaker 3: not to say they're going to get dragged into it,
Speaker 3: but I think if anyone else is at risk of
Speaker 3: getting dragged into this sort of CPI RPI mismatch, it
Speaker 3: could be companies like that that have sort of stressed
Speaker 3: financial positions. Should we say, But again Thames is almost
Speaker 3: a nice unique event, a unique company, and that it
Speaker 3: had the just high scheering eighty percent the average is
Speaker 3: around sixty five. That's very low interest coverage, quite a
Speaker 3: high proportion of RPR linked and a poor operational performance.
Speaker 3: And you combine all those things and end up where
Speaker 3: we are. I don't think any other company is quite
Speaker 3: in the same position, so read across at the minute
Speaker 3: is limited to Terams, but as you've seen another company's
Speaker 3: bond at the water company sector bond, they have the
Speaker 3: spreads have widened, yields of risen because of the increased
Speaker 3: risk that people are assigning to them.
Speaker 1: Thanks very much, Paul Vickers of Bloomberg Intelligence. You can
Speaker 1: read all of this great analysis on the Bloomberg Terminal.
Speaker 1: Do check it out and hope to see you back
Speaker 1: on the show soon.
Speaker 3: Paul, Yeah, look forward to it.
Speaker 1: Thanks James, and thanks again to Carmen Arroyo from Bloomberg News.
Speaker 1: Read all of her great structured finance scoops on the
Speaker 1: terminal and at Bloomberg dot Com. Thanks James, I'm James Crumbie.
Speaker 1: It's been a pleasure having you join us again next
Speaker 1: week on the Credit Edge.