In the last two days both South West Water and Severn Trent have issued prospectuses via the London Stock Exchange targetting bond markets to raise finance via their respective financial subsidiaries.

The water companies are the first to return to the debt market since Ofwat proposed a total spending package of £88 billion for the upcoming 2025-30 investment programme on 11^th July by the water companies in England and Wales. The regulator’s draft determinations represent a reduction of £16 billion for their AMP8 Business Plans.

Severn Trent and South West Water are both making bond offerings - which may provide some indication of investors’ current view of UK water company debt in the light of Thames Water’s financial situation.

Yesterday Moody's Ratings downgraded Thames Water’s long-term corporate family rating (CFR) of Utilities Ltd Thames Water's to Ba2 from Baa3 – a move described by the Financial Times as “Thames Water’s credit rating slashed to ‘junk’.”

On 23^rd July South West Water Finance Plc (SWWF) issued a 173 page Base Prospectus setting out a £2,500,000,000 Euro Medium Term Note Programme “unconditionally and irrevocably guaranteed” by South West Water.

SWWF’s sole function is to raise borrowings and provide finance for its immediate parent company South West Water Ltd, its single shareholder. SWWF is wholly reliant on capital and interest receipts from SWW to meet its external borrowings obligations. Stakeholders include the holders of long term bonds issued by the company, which is considered a business unit of SWW.

As the issuer, SWWF is a special purpose vehicle incorporated for the sole purpose of raising borrowings for South West Water and is dependent on the water company as guarantor paying interest on, and repaying, in a timely manner, all loans and advances.

Factors flagged up in the Prospectus that may affect the guarantor’s ability to fulfil its obligations under the notes and the guarantee include the public perception of the water industry and its legitimacy to provide value, environmental stewardship, increased challenges on efficiency and performance and the imposition of increased levels of competition across the sector.

The Prospectus states:

“Any changes in the policies of the UK Government concerning the water industry and/or additional environmental legislation may have an adverse impact on the Group’s business, financial condition or results of operations and may therefore have an adverse impact on the Guarantor’s ability to satisfy its obligations under the Notes and/or the Guarantee...

“Generally speaking, there remains an increased appetite amongst the UK regulators for pursuing enforcement action for any non-compliance (or perceived non-compliance) with laws and regulations.”

On 22^nd July Severn Trent Plc and Severn Trent Utilities Finance Plc (STUF) issued a 135 page Prospectus relating to a €10,000,000,000 Euro Medium Term Note Programme with Severn Trent Water Ltd as guarantor of notes issued under the programme by Severn Trent Utilities Finance Plc. 

The Prospectus states that payments of all amounts payable in respect of Notes issued by STUF will be "unconditionally and irrevocably guaranteed" by Severn Trent Water Ltd.

Severn Trent Utilities Finance Plc is a wholly owned subsidiary of Severn Trent Plc and operates as part of the Severn Trent Group’s regulated water and wastewater business.

The principal activity of the company is the provision of long term finance for its immediate parent Severn Trent Water Ltd. The company has external borrowings which it subsequently lends to Severn Trent Water on the same terms. Borrowings payable as at 31st March 2024 were £6,042.3 million (2023: £5,153.8 million) according to STUF’s annual report and financial statements for the year ended 31 March 2024.