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New York-listed insurance company Assured Guaranty has amassed more than $10bn of exposure to some of the most heavily indebted UK water utilities, underlining how the risks in the troubled sector have spilled beyond the country’s borders.
Assured Guaranty could end up having to pay out to lenders if companies such as Thames Water and Southern Water default or fail to make interest repayments. UK water utilities, under pressure from rising inflation and increasing regulatory scrutiny, are labouring under £60bn of debt.
“We feel the UK water company debt we have insured has a strong credit profile, as it provides an essential public service and is in a well-regulated industry where we guarantee the senior level debt, all of which has underlying investment grade ratings,” Nick Proud, a senior managing director at Assured Guaranty, said in an emailed statement. “To date, a UK water company has not defaulted on their debt.”
Assured Guaranty typically works with lenders financing US municipal government-backed infrastructure projects, providing insurance which pays out to debt investors if a borrower defaults.
The products can help boost the credit rating of bonds and encourage lenders to back companies that might otherwise struggle to raise financing. When triggered, the insurance is structured to pay out over time, mirroring how the loans being covered would be repaid.
However, the group has also built up about $1.9bn in exposure to Thames Water alone, with Southern Water its largest non-US exposure at $2.2bn, according to results published in March. Anglian Water, Yorkshire Water and Dŵr Cymru Welsh Water are all among their top 10 non-US holdings, the results show.
Assured Guaranty has been ratcheting up its activity in the UK water sector over the past 18 months, striking a new deal to provide cover to lenders to Portsmouth Water in June and last year agreeing to provide liquidity facilities to Yorkshire Water.
Rating agency S&P has negative outlooks for about two-thirds of the UK water companies it rates — indicating the possibility of downgrades if financial performance worsens.
The UK government was said to have discussed plans to put failing water companies into a “special administration regime”, with Thames Water front and centre of discussions after the abrupt departure of its chief executive last month.
UK water regulator Ofwat is closely monitoring the financial health of five UK companies — Thames Water, Southern Water, SES Water, Portsmouth Water and Yorkshire Water.
Thames Water, Southern Water and Yorkshire Water have all secured commitments from shareholders to put in hundreds of millions of pounds of additional investment in recent weeks in a bid to shore up their finances.
The crisis prompted some lenders to Thames Water, England’s largest privatised water facility, to hire advisers to assess their options if the business was placed into special administration.
“Our role has very much been holding the hands of anxious investors,” Jennifer Marshall, a partner at law firm Allen & Overy, said. “So far . . . there haven’t been any defaults. At this stage, it’s contingency planning and people trying to understand their rights.”
Fitch Ratings downgraded Southern Water’s credit rating on Friday, while maintaining a negative outlook, noting a number of challenges for the business including “high interest costs and a long-dated derivatives portfolio with meaningful mark-to-market liabilities”.
Assured Guaranty’s exposure to UK water companies is nearly equal to the group’s total “claims-paying resources”, which stood at $10.8bn at the end of March. It reported net income of $124mn last year.
Proud said that Assured Guaranty had a “long history of successfully mitigating potential losses”, however, and noted that the group had maintained “a relatively constant level of claims paying resources over the past 15 years”.
The insurer carries strong credit ratings of AA and A1 from S&P and Moody’s respectively, with the latter citing its “strong capital profile” and “conservative underwriting”.
So-called monoline insurers like Assured Guaranty typically provide insurance to securities backed by governments, meaning it is unlikely that the borrowers will default on their loans. In the US, its largest exposures included the state of New Jersey and the Port Authority of New York.
The products it sells were popular before the global financial crisis but lots of providers blew up after writing large amounts of insurance for securities backed by subprime mortgages, among other things.
