Goldman Sachs Group executed more than £1 billion (S$1.7 billion) of trades in Thames Water’s bonds in September, as it made a market between original investors exiting the beleaguered utility and opportunistic players scooping up the debt at a discount.
Hedge funds and distressed funds are continuing to bid for the debt of the UK’s largest water provider, said dealers at the US bank in a note to clients seen by Bloomberg on Sep 30. Around £3 billion of bonds have changed hands in total last month, according to the note.
The trading comes as the company has kicked off talks with creditors while it struggles to raise equity. Worries the firm will soon run out of cash led S&P Global and Moody’s Ratings to downgrade its Class A debt – deemed the safest – by five and six notches respectively last week. They also downgraded its riskier Class B debt.
“The Thames structure remains topical at GS as risk continues to change hands post downgrade,” the bank said in the note. “Selling was initially in Class B debt, but more recently we’ve been sellers of Class A risk as well.”
Buyers are favouring the more illiquid and lower cash price paper, as the market difference between shorter-dated and longer-dated bonds flattens, the note added. Companies with large amounts of debt often have bonds with wildly differing cash prices because notes are issued over multiple years at different points in the rate cycle.
Thames Water’s £400 million of bonds due in 2058 were indicated at 75.9 pence on the pound on Tuesday (Oct 1) morning, down almost 10 pence since the beginning of September, according to data compiled by Bloomberg. Meanwhile, its Class B notes due in 2027 are quoted at around 16 pence on the pound, down from 36 at the beginning of September.
Goldman Sachs has also been trading some of Thames’s bank debt, with £145 million changing hands via its desk since April, according to the note. A spokesperson for Goldman Sachs did not immediately respond to a request for comment.
S&P sees a debt restructuring – and consequently a default – as likely in the coming 12 months. The company has said it does not expect to receive funds in the form of equity ahead of a final determination by regulator Ofwat, expected at the earliest on Dec 19.
Thames has been negotiating with a group of creditors holding £10 billion of the company’s Class A debt over options to delay a potential liquidity shortfall. The group of creditors – including investors from BlackRock and Elliott Investment Management – has been working on its own plan to address the need for new funds and the unsustainable debt pile. BLOOMBERG
