Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Macquarie has agreed to inject up to £1.2bn of fresh equity into struggling utility Southern Water as part of a recapitalisation that will result in the debt owed to its holding company lenders being cut by more than half.
Southern’s Australian owner will initially pump £655mn of equity into the company — which provides water and sewerage services to 4.7mn customers in the south-east of England.
Macquarie intends to provide a minimum of £245mn in additional equity by December, a sum that could rise to as much as £545mn.
As part of the deal Macquarie has also agreed a debt restructuring with lenders to Southern Water’s holding companies, which will apply significant haircuts to the riskiest bonds in the group’s multi-tiered financial structure.
While Southern’s finances are in a less precarious position than those of Thames Water, the UK’s largest water utility that was previously owned by Macquarie, it is still on a watchlist of financially stressed companies monitored by the regulator, Ofwat. It has come under pressure in debt markets over concerns it could breach its covenants.
Southern also faces a backlash from the general public for sewage outflows at some of the UK’s most popular beaches, including Brighton and Whitstable, and is at risk of water shortages after years of under-investment. The company has considered importing water from the Norwegian fjords.
By 2030 Southern will raise annual customer bills by £222 to £642, the largest increase agreed between any of the UK’s 11 privatised water and sewage companies and the regulator. This bill increase comes on top of other inflation-linked rises.
Southern has appealed to the UK’s Competition and Markets Authority to be able to increase bills even further over the next five years to help it finance upgrades.
Meanwhile, the company paid chief executive Lawrence Gosden a £183,000 bonus last year, helping to boost his total pay by 79 per cent to £764,200.
Southern announced on Tuesday that the debt across its holding companies would be reduced from £865mn to £415mn. There are two main tiers of debt above Southern’s operating company, which sit at a middle holding company and a top holding company respectively.
Bondholders including Ares Management and Australian infrastructure investor Westbourne Capital have agreed to a full writedown of their roughly £370mn of debt, according to a person familiar with the matter.
In return, they will receive an “equity-like” investment in the water company, the person added, in an arrangement similar to a debt-for-equity swap, in which these bondholders receive a minority stake in the business.
Bondholders at the middle holding company will see no impairment to the face value of their debt, the person said, but have agreed to change the terms of the debt and extend its maturity.
The maturities of the remaining debt facilities are being extended to at least September 2030, according to the announcement on Tuesday.
The writedowns are seen as a way to allow new equity to flow directly into the utility’s heavily-indebted operating company, rather than being used to service debt further up the capital structure.
In February, Macquarie committed to injecting £900mn of fresh equity into Southern, an increase on the £650mn it had promised previously.
“This additional equity investment demonstrates our commitment to Southern Water and its management team, and our belief that the planned investment programme will deliver for its customers and the environment,” said Martin Bradley, a senior managing director at Macquarie Asset Management.
