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UTILITIES: Thames Water (THAMES Ba2[N]): Bonds Weak

UTILITIES
  • THAMES continues its down move; up to 1.5pts lower today. THAMES 4 27 is down 5.5 points since the draft determination response last week.
  • In that statement management finally admitted what the market has long known. It is uninvestable as the previous owners conceded months ago. This publicly contradicts the government’s stance that is still financially viable.
  • Rather than finding any middle ground with the Ofwat determination, it increased its ask for bill increases from 40% to 52-59% due to revised projections.
  • The market awaits the final determination in December. Assuming no material changes between now and then that could be the catalyst for the inevitable SAR action.
  • The key credit driver will be the size of haircut under SAR. That will depend heavily on the amount of emergency senior government funding and the timescale to restructure. In our view, the sooner SAR is initiated the better for creditors – better to initiate the process early and ahead of further cash burn.
  • Bonds remain above the lows, with ~70c briefly touched following the Moody’s downgrade. Uncertainty over the haircut size remain high, but we view more than 30c as unlikely. 70c therefore remains a likely target level for opportunistic investors.
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