UK water sector is riskiest for investors in Europe

The UK water industry is the riskiest sector for investors of any utilities in Europe, research by analysts at Barclays has found.
A survey of 46 interested parties by the bank’s research arm found that “overall there has been a deterioration in investor sentiment . . . following the publication of the draft determination [Ofwat’s interim price settlement for companies for the next five years], Thames [Water’s] travails, government policy intervention and credit downgrades.”
The Barclays note concluded: “UK water came in — very clearly — as the riskiest European regulated utility.”
It added that this appeared to be an Ofwat regulation issue rather than British economy problem: “UK power actually topped the list as most preferred.”
The Barclays analysts warn that the high-profile problems at Thames, the UK’s largest water company, is risking the spread of contagion across the sector.
Abandoned by all nine of its shareholders who have declared the company in its present state as “uninvestible” and written off their investments, Thames Water is in negotiations with competing groups of creditors standing behind the group’s £18 billion of debt to arrange £3 billion in bridging loans to see it through to the end of the year. The risk of the company falling into administration continues to stalk the company and its creditors.
With Ofwat playing hardball with the industry, which is demanding huge rises in bills, Thames is thought to be a likely candidate to take the regulator to the Competition and Markets Authority (CMA) when a final price settlement is published just before Christmas.
Barclays thinks that it will be joined by a record number of other water companies taking Ofwat’s final determination to the CMA.
Their survey found that an “unprecedented” five to seven water companies will go to the CMA. The English and Welsh water industry is dominated by nine privatised monopolies with a handful of other local suppliers.
The survey said: “Contagion risk on investment in the UK has risen. In April [in a previous survey by the bank], 64 per cent of investors believed a poor performance of UK water would impact their view on UK investment. This has now risen to 75 per cent of investors.”
Regarding the impact of the situation at Thames on the rest of the sector, the analysts said: “Given the regulatory framework has been unable to preserve Thames Water’s investment grade status and exposes Class A bondholders to restructuring headwinds, contagion risk to the broader sector has kept on growing in recent weeks.”
They said that Ofwat’s stance was “unhelpful but workable” for the financially stronger companies such as Severn Trent in the Midlands and United Utilities in the northwest.
However, they said that Ofwat was being “insufficiently supportive such that weaker companies might struggle to attract new equity”. Taking its cue from previous Ofwat statements, it named those companies as Thames Water, Southern Water, Wessex Water and South East Water.
Barclays said: “Even if investors have become increasingly selective within the sector, we believe that future market access and the future cost of funding for UK water companies will be materially impacted by Thames Water’s final outcome but also by Ofwat’s stance in the final determination.”