WEBVTT - Subprime Auto-Loan Shock; Thames Water Meltdown 0:00:15.720 --> 0:00:18.800 Hello, and welcome to The Credit Edge, a weekly markets podcast. 0:00:19.079 --> 0:00:21.720 My name is James Crombie. I'm a senior editor at Bloomberg. 0:00:22.360 --> 0:00:24.280 This week, we're very pleased to have on the show 0:00:24.560 --> 0:00:28.720 Carmen Arroyo, who covers structured markets for Bloomberg News in 0:00:28.720 --> 0:00:30.640 New York. How are you, Carmen, I'm good. 0:00:30.720 --> 0:00:31.960 Thank you for having me, James. 0:00:32.040 --> 0:00:34.600 We're also delighted to welcome back Paul Vickers, who covers 0:00:34.720 --> 0:00:39.040 utilities for Bloomberg Intelligence in London. Hello, Paul, James. We'll 0:00:39.080 --> 0:00:41.120 be coming back to Paul to talk about Thames Water, 0:00:41.440 --> 0:00:44.720 the UK utility that's blowing up and dragging the whole 0:00:44.720 --> 0:00:49.479 sector down. So do stay with us. But first, Carmen 0:00:49.560 --> 0:00:52.800 Arroyo with Bloomberg News, what's the big story now with 0:00:52.880 --> 0:00:54.080 asset backed securities? 0:00:54.480 --> 0:00:56.840 Sure, well, thank you so much for having me. But 0:00:57.280 --> 0:00:59.360 let's talk a little bit about asset backed securities. As 0:00:59.360 --> 0:01:04.040 you said, sip back securities are basically bonds that repackage 0:01:04.080 --> 0:01:08.319 any type of consumer dead and they're typically very safe 0:01:08.360 --> 0:01:12.040 and investors love them. The problem right now is that 0:01:12.480 --> 0:01:15.440 the dead that they repackage, which is given to consumers, 0:01:16.040 --> 0:01:20.399 is got getting a little bit more hairy. Consumers are 0:01:20.440 --> 0:01:24.160 basically running out of pandemic savings, so they're falling back 0:01:24.200 --> 0:01:27.119 on their payments, and some of the loans they took out, 0:01:27.120 --> 0:01:30.080 they're just not paying them back, which is impacting the 0:01:30.120 --> 0:01:33.400 bonds that are or this impacting the bonds that are 0:01:33.400 --> 0:01:36.640 associated with those loans. And that's specially true in the 0:01:36.680 --> 0:01:37.959 subprem autos sector. 0:01:38.319 --> 0:01:39.840 So let's just break that down a little bit for 0:01:39.840 --> 0:01:42.400 those people who don't know this stuff. Asset backed securities. 0:01:42.959 --> 0:01:45.440 I mean, you know, David Bowie once got a big 0:01:45.480 --> 0:01:50.360 loan from repackaging revenue from future music sales. Then streaming 0:01:50.400 --> 0:01:53.240 came along, so that didn't work out so well for investors, 0:01:53.600 --> 0:01:55.720 but he did get the money. And then in two 0:01:55.800 --> 0:01:59.880 thousand and eight the global financial crisis, structured finance ced. 0:02:00.600 --> 0:02:04.920 All these structured products were responsible for the implosion of 0:02:04.960 --> 0:02:10.320 the global financial system. What about for cars car loans? 0:02:10.360 --> 0:02:11.400 How does this all work? 0:02:11.720 --> 0:02:14.639 Yeah? Sure, so how it works is basically, if you're 0:02:14.720 --> 0:02:17.320 like a subprime model lender, you're basically a company that 0:02:17.360 --> 0:02:20.880 gives out loans to consumers that need a loan for 0:02:20.919 --> 0:02:24.520 a car. Right, So, in order to get more capital in, 0:02:24.639 --> 0:02:26.840 what you do is you put all those loans together 0:02:27.240 --> 0:02:29.640 and you sell them as a bond to investors in 0:02:29.680 --> 0:02:32.360 Wall Street, and then that way you can access like 0:02:32.520 --> 0:02:36.120 cheap financing. That's usually how it works. It's just putting 0:02:36.160 --> 0:02:39.720 together a bunch of different loans and then repackage them 0:02:39.760 --> 0:02:43.800 as a bond. So it's basically like financial engineering, like 0:02:43.840 --> 0:02:47.440 it's a secondary market for the debt. Does that make sense? 0:02:47.760 --> 0:02:50.119 Yeah, that's good, But so then why are we talking 0:02:50.120 --> 0:02:52.639 about them now? What's the big deal with abs and 0:02:52.880 --> 0:02:54.760 why in particular in the car sector. 0:02:55.600 --> 0:02:59.200 Sure, So, this shit that's happening in the auto abs 0:02:59.240 --> 0:03:02.639 world is that consumers are increasingly not paying back their 0:03:02.680 --> 0:03:06.400 auto loans. And that's usually fine, but it's not fine 0:03:06.480 --> 0:03:11.160 for bonds associated with two specific lenders. Those are American 0:03:11.200 --> 0:03:14.880 Car Center and US Auto Sales. Those two subprime lenders 0:03:14.919 --> 0:03:18.240 basically close down their dealerships and close down their businesses 0:03:18.240 --> 0:03:21.239 like a few months ago, So consumers that had loans 0:03:21.240 --> 0:03:24.680 with them are no longer paying them back and that's 0:03:24.760 --> 0:03:29.040 becoming an issue for Wall Street. There are bondholders out 0:03:29.040 --> 0:03:32.600 there that own the riskiest trenches of those bonds that 0:03:32.639 --> 0:03:36.240 are associated with those loans, and they're starting to get 0:03:36.240 --> 0:03:40.840 worried because the borrowers are defaulting a lot on their debt. 0:03:42.840 --> 0:03:44.840 So the issue there is that if they fought, if 0:03:45.200 --> 0:03:48.760 a critical mass of borrowers stopping back their dead, they 0:03:48.800 --> 0:03:52.560 could take losses on the bonds. And that's basically never 0:03:52.680 --> 0:03:55.680 happened in auto bonds. Just a couple times in the 0:03:55.760 --> 0:04:00.240 nineties and it was like really really different scenario. So 0:04:00.280 --> 0:04:02.920 Wall Street is starting to get worried about how like 0:04:03.160 --> 0:04:06.560 consumers are paying back their debt or not within the 0:04:06.600 --> 0:04:07.320 auto sector. 0:04:07.800 --> 0:04:10.400 Why is it so unusual to see losses here, Well. 0:04:10.360 --> 0:04:13.040 It's very unusual because the way this bonds work is 0:04:13.040 --> 0:04:15.760 that you put up a lot of collateral I meaning 0:04:15.760 --> 0:04:18.320 you put up a lot more loans than you expect 0:04:18.360 --> 0:04:21.680 them to default. So when that one loan defaults, you 0:04:21.720 --> 0:04:24.680 take it out of the basket. But right now so 0:04:24.760 --> 0:04:27.760 many loans are defaulting that there's just not enough protection 0:04:27.880 --> 0:04:31.080 for investors. So these like the borrowers are like the 0:04:31.080 --> 0:04:34.039 bond holders of those risky ast trenches, stand to take 0:04:34.160 --> 0:04:37.600 losses if borers keep defaulting at the same rate, and 0:04:37.640 --> 0:04:40.680 that's we're almost there, basically, and that would be a 0:04:40.720 --> 0:04:43.760 really big deal for the audubon market because it's just 0:04:43.839 --> 0:04:49.600 never happened before in the public audubon space, like subprime. Yes, 0:04:49.680 --> 0:04:52.640 so it's it's it's supprime. It's not prime dead, so 0:04:52.720 --> 0:04:55.359 it's prime. It's dead given out to kind of like 0:04:55.400 --> 0:04:58.239 the riskiest borrowers, like people that have like maybe lower 0:04:58.240 --> 0:05:01.640 FICO scores or that have like maybe don't have W two. 0:05:01.680 --> 0:05:05.880 So it just depends. But it's usually like bor wars 0:05:05.920 --> 0:05:09.240 that have like lower credit scores or lower capability of 0:05:09.279 --> 0:05:10.000 paying it back. 0:05:10.640 --> 0:05:12.880 But by subprime, I mean, you know, the last time 0:05:12.880 --> 0:05:15.920 I heard subprime defaults on this scale, it was two 0:05:15.920 --> 0:05:18.440 thousand and eight and the whole housing market was falling 0:05:18.440 --> 0:05:21.000 apart and that led to a catastrophe. We talk about 0:05:21.000 --> 0:05:22.440 the same same scale here. 0:05:22.720 --> 0:05:25.640 It's not the same scale though. First of all, like 0:05:25.960 --> 0:05:28.559 other loans are much shorter in nature, so they're also 0:05:28.640 --> 0:05:31.400 like the loan sizes are smaller. It's not like if 0:05:31.440 --> 0:05:33.919 you have a mortgage, like a mortgage is almost in 0:05:33.960 --> 0:05:36.400 the US, a mortgage can be like a thirty year product, 0:05:36.720 --> 0:05:39.640 so you're really tied to that as a borrower, but 0:05:39.720 --> 0:05:42.359 like auto loans can be like five years, can be 0:05:42.400 --> 0:05:44.560 three years, so you can kind of pay it back. 0:05:44.600 --> 0:05:47.839 So it's not the same scale at all, And in 0:05:47.880 --> 0:05:50.839 this case in subprime auto bones, it's just this is 0:05:50.920 --> 0:05:54.400 happening subprime auto bones defaulting. It's just happening with some 0:05:54.640 --> 0:05:59.080 lenders that were particularly tailored to risky borrowers. So it's 0:05:59.080 --> 0:06:01.120 not happening across the space yet. 0:06:01.560 --> 0:06:03.560 And some investors are going to take a loss. How 0:06:03.640 --> 0:06:05.120 much are they going to lose? They're going to get 0:06:05.120 --> 0:06:06.160 wiped out, They. 0:06:06.120 --> 0:06:08.240 Could get they could potentially get wiped out. We just 0:06:08.279 --> 0:06:12.360 have to see how those defaults evolve. So if if 0:06:12.360 --> 0:06:15.279 a critical mass actually defaults, yes, they could stand to 0:06:15.320 --> 0:06:18.440 lose almost everything on those bonds, like they would take 0:06:18.520 --> 0:06:20.919 losses on the principle, not on the interest, which is 0:06:20.960 --> 0:06:24.680 a pretty big deal. But we we still have to see. 0:06:24.680 --> 0:06:25.640 We're not there yet. 0:06:26.520 --> 0:06:30.679 So some investors, you know, large investors, presumably institutional guys, 0:06:30.720 --> 0:06:35.520 they took some risk. Now they take some losses. Who cares? 0:06:35.520 --> 0:06:37.320 I mean, is there a bigger impact from this? I mean, 0:06:37.400 --> 0:06:39.960 is there a ripple effect that that rips through the 0:06:40.080 --> 0:06:42.760 entire structure finance market? Is there something that's going to 0:06:42.760 --> 0:06:44.320 blow up here? Do you think so? 0:06:44.360 --> 0:06:46.680 One of them One of the bigger takeaways of this 0:06:46.839 --> 0:06:52.479 is just like this, this subprime lenders. Auto lenders kind 0:06:52.480 --> 0:06:54.640 of like started relying a lot on the ASCID backed 0:06:54.640 --> 0:06:58.359 securities market to get liquidity, and they issued like their 0:06:58.400 --> 0:07:01.000 issuance went up by a lot in the past five years. 0:07:01.839 --> 0:07:04.880 So kind of the takeaway is that if investors start 0:07:04.920 --> 0:07:08.240 losing faith on these kind of bonds, how are these 0:07:08.360 --> 0:07:11.040 lenders going to get financing? And do we expect to 0:07:11.040 --> 0:07:13.400 see more of these slenders go bankrupt? 0:07:13.760 --> 0:07:17.120 And then sort of underlying it though, I mean, is 0:07:17.160 --> 0:07:20.160 this just really a story about the US consumer? Is 0:07:20.200 --> 0:07:22.000 that where the pressure is coming from. 0:07:22.080 --> 0:07:25.560 Yeah, that's correct, And it goes back to the same thing, right, like, 0:07:25.560 --> 0:07:29.160 if there's fewer subprime lenders out there available to give 0:07:29.240 --> 0:07:33.040 credit to consumers, where a consumers going to get financing 0:07:33.080 --> 0:07:35.480 for their needs, They're just going to be squeezed out 0:07:35.480 --> 0:07:36.080 of the market. 0:07:36.640 --> 0:07:39.920 And those subprime consumers that we're talking about, they depend 0:07:40.520 --> 0:07:42.960 on a car in lots of cases for their livelihood. 0:07:42.960 --> 0:07:45.080 They need it to get to work. It's the last 0:07:45.080 --> 0:07:47.120 thing they'll give up, you know, before that. You know, 0:07:47.600 --> 0:07:49.960 maybe housing is the last bit, but the car is 0:07:50.320 --> 0:07:52.920 next to the last. Does it imply some kind of 0:07:52.960 --> 0:07:56.120 desperation on the palf of the American consumers. 0:07:56.440 --> 0:07:59.640 It's definitely showing that there's a portion of American consumers 0:07:59.640 --> 0:08:03.240 that can not would stand this current rates, current rate environment, 0:08:03.320 --> 0:08:06.520 and they're just running out of pandemic savings and if 0:08:06.520 --> 0:08:08.960 they can't get liquidity from you know, their credit cards, 0:08:09.000 --> 0:08:11.000 so they're auto dead. Where are they going to go? 0:08:11.480 --> 0:08:15.480 So it definitely signals that the economy is turning. 0:08:16.240 --> 0:08:18.080 Is there any regional pattern to this? Are there parts 0:08:18.080 --> 0:08:19.560 of the country that are doing better or worse? 0:08:19.680 --> 0:08:21.120 As far as we know, so the lenders that have 0:08:21.200 --> 0:08:24.760 gone bust, we're mostly and more in the South and 0:08:24.840 --> 0:08:29.280 in the north of the US, But it's broadly speaking, 0:08:29.320 --> 0:08:30.840 it's happening and across the country. 0:08:31.320 --> 0:08:34.600 So just going back to the financial engineering aspect, you 0:08:34.679 --> 0:08:37.480 mentioned that that term always really worries me. You know, 0:08:37.520 --> 0:08:41.120 the most complex, least transparent markets are often where trouble starts. 0:08:42.080 --> 0:08:44.920 You know, how worried should we be about structured finance 0:08:45.000 --> 0:08:46.720 right now? Are we expecting this to lead to another 0:08:47.080 --> 0:08:48.080 financial crisis? 0:08:48.840 --> 0:08:51.640 I don't think it's going to be a broad financial crisis. 0:08:51.640 --> 0:08:54.160 I think we're going to see it more like kind 0:08:54.160 --> 0:08:57.440 of like more pockets of the market go bad. So 0:08:57.640 --> 0:09:00.760 just like for instance, in the Audobonne space, it's subprime 0:09:00.800 --> 0:09:04.560 auto and it's specific lenders, and I think that's going 0:09:04.600 --> 0:09:08.840 to basically happen across everything that's structured. It's just like 0:09:08.960 --> 0:09:12.439 specific pockets, specific companies that are that cannot withstand the 0:09:12.480 --> 0:09:14.520 current rate environment, and that kind of grew a lot 0:09:14.600 --> 0:09:16.000 when rates were really row. 0:09:16.320 --> 0:09:18.079 And the rates on these things. A lot of it's 0:09:18.120 --> 0:09:21.080 floating rate, right, so it just as base rates rise. 0:09:21.720 --> 0:09:25.240 Yeah, it really depends, for instance, like mortgages are mostly fixed, 0:09:25.280 --> 0:09:27.600 Like it really depends on what product we're talking about. 0:09:27.600 --> 0:09:33.160 But yes, it like you're just seeing more consumers struggle 0:09:33.200 --> 0:09:35.080 with how much they have to pay on their debt. 0:09:35.320 --> 0:09:37.880 So before we talk to Pull Vickers at Bloomberg Intelligence, 0:09:37.920 --> 0:09:40.040 what's the next big thing we should be watching here? 0:09:40.080 --> 0:09:42.880 Common more downgrades, more losses, more distress. 0:09:43.280 --> 0:09:46.439 Yeah, that's basically we should be watching for which subprime 0:09:46.520 --> 0:09:49.640 lender is going to struggle next basically? And were are 0:09:49.679 --> 0:09:51.640 they going to go for liquidity if they can't go 0:09:51.760 --> 0:09:53.400 to the bond market, are they going to go to 0:09:53.400 --> 0:09:56.240 private credit? Are they going to go to distressed buyers? Like, 0:09:56.720 --> 0:09:58.200 what's the next step for them? 0:09:58.600 --> 0:10:01.880 Great stuff? Karaman from Bloomberg News Thank you so much 0:10:01.920 --> 0:10:04.679 for joining us. Read all of Carmen's scoops on the 0:10:04.679 --> 0:10:07.760 Bloomberg terminal and of course at Bloomberg dot com. So, 0:10:07.800 --> 0:10:10.480 as I mentioned earlier, there's a crisis in the UK 0:10:10.600 --> 0:10:12.880 water sector and we're very pleased to have with us 0:10:12.920 --> 0:10:16.760 Paul Vickers, who covers utilities for Bloomberg Intelligence based in London. 0:10:17.120 --> 0:10:18.959 How's it going, Paul James? 0:10:19.040 --> 0:10:22.040 Hi, we'll go here Banks. 0:10:21.320 --> 0:10:25.800 Great So Thames Water. It's the UK's biggest water provider. 0:10:26.520 --> 0:10:30.079 They polluted the rivers and they're being investigated by regulators 0:10:30.120 --> 0:10:33.559 and they're at risk of being nationalized because they can't 0:10:33.559 --> 0:10:37.440 pay back eighteen billion dollars equivalent in debt. Things are evolving. 0:10:37.640 --> 0:10:41.360 We're talking on July fifth. But what's the situation today, Paul. 0:10:41.360 --> 0:10:43.040 The bonds have dropped again. What's the latest. 0:10:43.360 --> 0:10:45.480 Well, the bonds are certainly jumping around quite a lot. 0:10:45.520 --> 0:10:47.840 I mean, if we don't usually get this volatility in 0:10:47.920 --> 0:10:51.160 water barns, it should be very stable and stable regime. 0:10:51.200 --> 0:10:53.640 But waiting for Thames Water to release their annual report, 0:10:53.679 --> 0:10:56.520 which is due by the fifteenth of June. That should 0:10:56.559 --> 0:10:58.880 give a lot more information. We're also waiting for us 0:10:58.920 --> 0:11:02.000 to see if they can get another billion pounds from 0:11:02.000 --> 0:11:05.720 their shareholders who have stump to up around half a 0:11:05.760 --> 0:11:08.440 billion only in March of this year. They probably need 0:11:08.440 --> 0:11:11.480 that other billion that they had here marching their business plan, 0:11:11.840 --> 0:11:14.480 the eight year business plan from the launch in twenty 0:11:14.480 --> 0:11:17.920 twenty one. Of course the CEO is resigned syntense, maybe 0:11:17.920 --> 0:11:22.360 that business plan is maybe not so valid anymore, but 0:11:22.440 --> 0:11:26.760 certainly they need to get that money from shareholders and 0:11:26.840 --> 0:11:30.680 press reports at the weekend we're encouraging in that respect, 0:11:30.760 --> 0:11:32.960 but they certainly need that otherwise they are at risk 0:11:33.000 --> 0:11:37.640 of getting put into what's called special Administration Regime regime 0:11:37.960 --> 0:11:39.959 or SAAR, which as you mentioned, is a sort of 0:11:40.160 --> 0:11:42.960 it's a form of there's an alternative to insolvent if you like, 0:11:43.040 --> 0:11:47.439 imposed by the regulator on essential services like energy and 0:11:48.280 --> 0:11:51.400 water to ensure that these companies can keep providing the 0:11:51.440 --> 0:11:55.560 services to essential services to the customers while a new 0:11:55.679 --> 0:11:58.439 buyer is found. And this is the last time we 0:11:58.480 --> 0:12:02.199 saw this was Bold Energy during the energy crisis, and 0:12:02.240 --> 0:12:04.760 you can getting transferred to Octopus Energy. So we have 0:12:04.840 --> 0:12:08.440 one example of this happening. You know, obviously bondholders and 0:12:08.440 --> 0:12:10.040 everyone termes of work, I'm sure I hopes we can 0:12:10.080 --> 0:12:12.720 avoid the second one, but I think for that to happen, 0:12:12.760 --> 0:12:15.160 it is going to need quite a considerable cash injection 0:12:15.920 --> 0:12:19.520 from existing shareholders, and hopefully will have that. I assume 0:12:19.640 --> 0:12:22.560 the news may come with any report on the fifteenth 0:12:22.559 --> 0:12:24.719 of June, which is the regulatory deadline, at least with 0:12:24.720 --> 0:12:27.320 the anual report. So we go, we're keeping it on 0:12:27.360 --> 0:12:28.160 the news until then. 0:12:28.400 --> 0:12:31.679 As you say, Paul, the water is a very stable business. 0:12:32.240 --> 0:12:33.920 What's the history though? How did it get into so 0:12:34.000 --> 0:12:34.520 much trouble? 0:12:35.160 --> 0:12:38.320 Well, yeah, terms does have the highest gearing in a sect, 0:12:38.559 --> 0:12:40.800 as you say that, they've got about fourteen billion pounds 0:12:40.840 --> 0:12:43.559 worth of debt eighteen billion dollars as you say, but 0:12:43.679 --> 0:12:47.199 this amounts around eighty percent of the sort of regulatory 0:12:47.240 --> 0:12:50.920 capital value, and that's above what of what caees is 0:12:51.000 --> 0:12:53.480 sort of acceptable level of sixty percent. That's a level 0:12:53.520 --> 0:12:56.080 that it it has set its sort of regulatory formula 0:12:56.200 --> 0:12:59.760 on and remunerates companies accordingly. So it cont a free 0:12:59.840 --> 0:13:02.760 this they're gearing above the sixty percent hide life and 0:13:02.800 --> 0:13:04.720 Thames has been an eighty percent for many years and 0:13:04.760 --> 0:13:07.480 plans to stay there for many more. But of course, yeah, 0:13:07.520 --> 0:13:11.400 this increases the risk and the return profile you know 0:13:11.679 --> 0:13:14.400 for shareholders. But obviously the risk side of that has 0:13:14.440 --> 0:13:18.360 been exposed by larger well AA and a poor operational performance. 0:13:18.440 --> 0:13:20.040 You say that they they've got a poor rep track 0:13:20.120 --> 0:13:23.120 record on more water leakage and sewer leakage. They've been 0:13:23.120 --> 0:13:26.680 fined for that customer service, that their operation record isn't good. 0:13:26.720 --> 0:13:29.200 But the bigger problem really is sort of financial pressure 0:13:29.200 --> 0:13:31.439 there under and all of that arises from the spike 0:13:31.559 --> 0:13:34.680 inflation which we've seen over the last year or so 0:13:34.800 --> 0:13:37.600 in the UK. Yeah, this has a number of effects 0:13:37.600 --> 0:13:40.160 on Thames Water and really it's the factor that it's 0:13:40.720 --> 0:13:43.160 putting them under financial pressure and if their regulators see 0:13:43.559 --> 0:13:45.959 deems they might be unlikely to be able to pay 0:13:46.000 --> 0:13:48.120 their debts, and that's a subjective due from the regulator, 0:13:48.360 --> 0:13:50.439 they can put them into an SAAR. And all the 0:13:50.480 --> 0:13:52.520 evidence and points to the fact that they are certainly 0:13:52.520 --> 0:13:56.800 getting very very tight against the sort of interest cover ratishops. 0:13:57.320 --> 0:13:59.880 I mean, what's happening is, you know, earnings are decreasing, 0:14:00.280 --> 0:14:03.560 is the cost to replace pipes and pay their staff 0:14:03.559 --> 0:14:07.440 are increasing a lot faster than their revenues. It's sort 0:14:07.440 --> 0:14:11.280 of increasing interest costs on their debt fifty eight percent, 0:14:11.400 --> 0:14:14.440 which is linked to RPI, and also any on any 0:14:14.480 --> 0:14:17.439 new debt issue in the market. Has also seen that 0:14:17.480 --> 0:14:21.920 the fair value of the index link which increases with inflation, 0:14:22.280 --> 0:14:24.960 and that's rising fast, and the regulatory caple value, So 0:14:25.000 --> 0:14:27.520 all of these things that are coming into play. Particular 0:14:27.560 --> 0:14:31.040 is RPI has moved well above CPI, which is what 0:14:31.080 --> 0:14:33.600 their revenues are based on. The gaps now around four percent, 0:14:33.720 --> 0:14:36.560 so the costs are rising four percent faster than the 0:14:36.600 --> 0:14:40.360 revenues are increasing at the same time, so actually say 0:14:40.360 --> 0:14:43.920 reducing earning, it's reducing interest cover, it's increasing gearing is 0:14:43.960 --> 0:14:47.800 putting a lot of pressure on those and almost covenant levels, 0:14:47.800 --> 0:14:49.960 and the last time they re bought with them in September, 0:14:49.960 --> 0:14:52.880 they're getting close to what we call a trigger covenant level, 0:14:52.880 --> 0:14:55.400 in which case, you know, bondholders can sort of step 0:14:55.440 --> 0:14:58.640 in and demand the sort of explanation and remedial action 0:14:59.360 --> 0:15:02.120 they're they're not put the heading away from default levels, 0:15:02.120 --> 0:15:03.960 so we're not at that sort of extreme point yet. 0:15:04.000 --> 0:15:06.200 But when they do release that was six months ago, 0:15:06.200 --> 0:15:09.400 when they do release the latest results with this annual 0:15:09.480 --> 0:15:12.360 report to you by the fifteenth of July, you know, I 0:15:12.400 --> 0:15:16.680 expect to see further pressure on those ratios because inflation 0:15:16.760 --> 0:15:19.080 has still been rising, that gap between RBI and CPI 0:15:19.120 --> 0:15:21.960 has increased even further. So we're really waiting to see 0:15:22.000 --> 0:15:24.360 where they are and if they are breaching any trigger 0:15:24.360 --> 0:15:27.920 covenment levels or on a fully of bases, in which case, 0:15:28.400 --> 0:15:31.320 without the equity injection, the regulator would be fully entitled 0:15:31.520 --> 0:15:32.680 to put them into an sa R. 0:15:33.360 --> 0:15:39.880 So it's basically a privatization. The new owners leathered up 0:15:40.360 --> 0:15:42.480 a lot of floating rate, a lot of inflation linked 0:15:42.760 --> 0:15:46.880 as you say, they pay themselves dividends. They kind of 0:15:46.960 --> 0:15:49.360 ran this thing into the ground and walk off and 0:15:49.440 --> 0:15:53.400 the government steps in. I mean, what's the big lesson Hippaul. 0:15:53.840 --> 0:15:56.200 Also, the privatization happen a long time ago. In terms 0:15:56.240 --> 0:15:58.200 has been running with very high gearing for a long 0:15:58.240 --> 0:16:00.880 time and they did story. The shareholders haven't actually taken 0:16:00.920 --> 0:16:03.440 dividends out of the company for around six years, so 0:16:03.600 --> 0:16:05.760 for them it's not being a particularly great investment. Recently. 0:16:05.800 --> 0:16:07.720 The Thames does of a very high one of the 0:16:07.800 --> 0:16:11.880 highest sort of capital expenditures. Is the largest water company UK. 0:16:12.000 --> 0:16:13.440 As you say, it serves as sort of you know, 0:16:13.520 --> 0:16:16.960 Thames Valley London area, So there's some pretty complicated old 0:16:17.040 --> 0:16:19.320 Victorian pipes and sewers they have to deal with. They're 0:16:19.360 --> 0:16:21.840 building a big super sewer along the Thames to try 0:16:21.880 --> 0:16:24.160 and alleviate some of those pressures. But it's certainly been 0:16:24.200 --> 0:16:27.280 a very challenging environment for Thames Water and the shell 0:16:27.320 --> 0:16:30.400 holders I say, haven't taken dividends and they've put another 0:16:30.680 --> 0:16:32.640 five hundred million in in March. They've been asked now 0:16:32.720 --> 0:16:34.400 to put another billion in. Whether they do or not, 0:16:34.440 --> 0:16:38.200 we'll have to see. But yeah, certainly, Yeah, the SAI 0:16:38.320 --> 0:16:39.920 is it is not quite a nationalization. I mean, what 0:16:39.920 --> 0:16:42.160 it would be is that the regulator would be looking 0:16:42.200 --> 0:16:45.080 for a new buyer to transfer the business to and 0:16:45.120 --> 0:16:47.400 they would be obliged to accept the best off another 0:16:47.520 --> 0:16:50.520 market offer, or any reasonable offer. But they would do 0:16:50.600 --> 0:16:52.760 to be obliged to accept the best offer. And of 0:16:52.760 --> 0:16:55.440 course that may well mean if the alternative is insolvent 0:16:55.520 --> 0:16:57.680 to your nationalization, that could mean as sort of the 0:16:57.720 --> 0:17:01.560 ecuyholder's getting zeroed and the bonds taking or or all 0:17:01.600 --> 0:17:04.960 the debt possibly taking quite a significant haircut. You know, 0:17:05.000 --> 0:17:07.360 are very broad to a rule of thumb. We looked 0:17:07.359 --> 0:17:09.240 at if a new owner wanted to take this company 0:17:09.240 --> 0:17:11.600 on at sixty percent gearing and said the current eighty percent, 0:17:12.240 --> 0:17:14.000 it would have to write into total amount of debt 0:17:14.000 --> 0:17:16.119 down by twenty five percent, and that would be, you know, 0:17:16.240 --> 0:17:18.160 a worst case scenario. But it just sort of shows 0:17:18.240 --> 0:17:21.200 extent of the risk facing the bond holders and certainly 0:17:21.240 --> 0:17:24.040 equity holders. And the equity holders now face to the dilemma, 0:17:24.160 --> 0:17:26.200 do we put another billion in? Is that enough to 0:17:26.400 --> 0:17:29.200 keep it going? Is that enough to provide enough liquidity 0:17:29.440 --> 0:17:31.080 and repay the debt that they've got due? I think 0:17:31.080 --> 0:17:33.280 one point eight billion to debt next due next year, 0:17:33.440 --> 0:17:35.800 next year, in twenty twenty four. Is that going to 0:17:35.840 --> 0:17:38.400 be enough for this to survive as a going concern 0:17:38.440 --> 0:17:40.200 and then in the long run turn it around and 0:17:40.320 --> 0:17:42.679 have to get the dividends back in the future. I mean, 0:17:42.720 --> 0:17:45.280 it's a very long game. That the water business is 0:17:45.359 --> 0:17:48.760 is strong, it's stable, so they can take a very 0:17:48.760 --> 0:17:50.600 long term view here and then may see, this is 0:17:50.600 --> 0:17:53.480 the short term pressure and another billion isn't really a problem, 0:17:53.520 --> 0:17:55.680 but it really is going to hinge on whether it 0:17:55.800 --> 0:17:56.840 get that extra capital. 0:17:57.400 --> 0:17:59.680 And some of the bonds were they not protected by 0:17:59.680 --> 0:18:02.200 some going clause that if there was nationalization, they'd get 0:18:02.280 --> 0:18:02.800 made whole. 0:18:03.240 --> 0:18:06.640 I believe there were some some private placements that were 0:18:06.640 --> 0:18:09.040 made during the time when the Labor Party under Jeremy 0:18:09.040 --> 0:18:11.680 Corbyn were talking about nationalizing the water industry. I think 0:18:11.800 --> 0:18:15.440 when they issued some bonds at that particular time, investors 0:18:15.480 --> 0:18:17.520 were concerned and so they put the covenant in saying 0:18:17.520 --> 0:18:19.880 that the nationalization would be able to like a change 0:18:19.880 --> 0:18:21.919 of control, if you like, you to learn some maximization 0:18:22.040 --> 0:18:24.320 be able to investors could put them back at part 0:18:24.359 --> 0:18:26.159 that doesn't apply to most of the bonds. They have 0:18:26.280 --> 0:18:28.560 live in existence for a lot longer than that, and 0:18:28.600 --> 0:18:30.800 the ones issue more recently, they's not seen the problem 0:18:30.800 --> 0:18:34.040 because obviously that that sort of pressure has gone away. 0:18:34.280 --> 0:18:36.639 And say an s AI isn't the nationalization. It's a 0:18:36.680 --> 0:18:40.879 different things. It's where it's put into a special regime 0:18:41.000 --> 0:18:43.680 in order to transfer the access to a new private 0:18:43.720 --> 0:18:46.880 buyer who would take it on, presumably at a sort 0:18:46.920 --> 0:18:49.840 of bargain basement price, a discount to bar or zero 0:18:49.960 --> 0:18:53.119 prevalue and try and turn it around. The last is 0:18:53.119 --> 0:18:55.040 aught they couldn't find a buyer, then the last resort 0:18:55.040 --> 0:18:58.239 would alms have to be in nationalization. And yeah, some 0:18:58.280 --> 0:19:01.879 of those bonds could under those circumstance could trigger those clauses. 0:19:01.880 --> 0:19:04.879 But there are really any applies to few private placements, 0:19:04.880 --> 0:19:06.760 not the vast majority of their public debt. 0:19:07.240 --> 0:19:10.880 What's your base case now, Paul? Can they avoid special administration? 0:19:13.080 --> 0:19:14.800 Can they avoid it? Well, only if they get this 0:19:16.119 --> 0:19:19.680 capital injection from those shareholders in my opinion, As I said, 0:19:19.680 --> 0:19:22.320 press reports were favorable on that over the weekend. There's 0:19:22.320 --> 0:19:27.000 some very large long term sort of infrastructure funds, some 0:19:28.720 --> 0:19:31.920 pension funds in there, some sovereign wealth funds. So there's 0:19:31.920 --> 0:19:35.600 certainly some deep pocketed shareholders who could take a very 0:19:35.600 --> 0:19:37.600 long term view on us and say, yeah, we do 0:19:37.640 --> 0:19:40.760 still like the sector. There is another regulatory review coming 0:19:40.840 --> 0:19:43.280 up in twenty twenty five when maybe some of these 0:19:43.280 --> 0:19:45.439 problems could be resolved and we still have faith in 0:19:45.440 --> 0:19:48.480 the sort of the UK water system as it spans. 0:19:48.480 --> 0:19:51.120 So yeah, we will have to hope for that extra rebellion. 0:19:51.600 --> 0:19:53.639 As I say, that should be the news on that 0:19:53.680 --> 0:19:56.680 certainly should be coming with the annual report. But short 0:19:56.680 --> 0:19:58.679 of that, then they really they have plenty of they 0:19:58.720 --> 0:20:02.520 say liquidity, as are therefore liquidity. Whether they can draw 0:20:02.600 --> 0:20:05.760 all on that, all of that down is debatable because 0:20:05.800 --> 0:20:07.919 they have some other covenant that restrict the amount of 0:20:08.320 --> 0:20:10.760 debt maturities they can have over over the twenty four 0:20:10.800 --> 0:20:14.360