(Bloomberg) -- Debt traders are upping their bids for pieces of the proposed emergency funding Thames Water is trying to secure from creditors, in a sign of how attractive the terms are to investors.
Offers for the debt — which will consist of an initial tranche of £1.5 billion ($2 billion) and will pay annual interest of 9.75% — rose to around 105 pence on the pound on Wednesday from around 101 a day earlier, according to people familiar with the matter, who spoke on condition of anonymity.
That’s a hefty — and rising — premium on a super senior debt facility that’s set to be issued at 97 pence, and already features some additional sweeteners to win over investors.
Trading desks at Barclays Plc, Goldman Sachs Group Inc, JPMorgan Chase & Co. and Seaport Global Securities LLP are among those who have been bidding for chunks of the emergency funding, Bloomberg previously reported. Traders at BNP Paribas SA are also trying to make a market for the debt, some of the people said.
A spokesperson for BNP Paribas declined to comment.
Thames Water announced the new financing on Oct. 25, as part of a deal with a group of holders of the more senior Class A debt. Elliott Management Corp, Silver Point Capital LP, Apollo Global Management Inc., DE Shaw & Co. LP, Diameter Capital Partners, Pacific Investment Management Co, and Sona Asset Management are among the funds in this group.
Thames Water is raising emergency debt as a way to postpone an imminent liquidity crunch. In the longer term, it’s looking to raise billions in equity, to fix chronic leaks and sewage spills, as well as cope with a growing population and climate change, while at the same time addressing its debt stack.
Investors in the new debt will earn sign-up fees. In addition, the financing comes with a so-called make-whole clause, meaning Thames Water will have to pay a premium over face value if it decides to repay or refinance the debt ahead of maturity in 2.5 years’ time.
The company needs the funds to extend existing debt and access cash reserves to avoid running out of operating capital by early next year. Critics, chiefly other creditors that have a rival proposal, argue it’s an expensive option for the heavily indebted utility.
Tim Whittaker, a research director at the EDHEC Infrastructure Institute, calculates the extra debt would lead to a £300 million increase in interest expenses, if the first tranche of the £1.5 billion is fully subscribed.
“It’s a nice bit of value engineering for the participants but won’t solve any of Thames’ troubles,” he wrote in an email.
While Thames customers help to cover interest payments through bills, those costs are capped by the regulator Ofwat, which sets an allowed return on debt every five years.
A spokesperson for Thames declined to comment.
Laying Groundwork
The money is not yet available for Thames. First, the company needs the consent of at least 75% of its creditors by a deadline of Nov. 19. The deal currently has the backing of around 40% of its creditors, the company said on Friday.
Once it’s passed the three-quarters threshold, Thames will need to seek a court sanction of the proposal with a first hearing expected on Dec. 17.
The company might face some opposition from a group of Class B creditors, who have also put forward their own financing proposal for the company. The over £1.5 billion comes with an annual coupon of around 8%, Bloomberg previously reported.
It would envisage no make-whole clause, according to two separate people familiar with the matter, who asked not to be identified as the details of the talks are private. The proposal would help the junior creditor group avoid major losses on their holdings.
Following the issuance of the super senior debt, the beleaguered utility estimates its total liabilities will reach about £17.9 billion by March 2025, it said on Friday.
--With assistance from Jessica Shankleman.
(Updates with details over the class B bondholder proposal in penultimate paragraph.)
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