Thames Water: Water bonds away

The biggest whole business securitisation in sterling to date and a relatively successful issuance given the stasis in the wider ABS market at the time, the Thames Water securitisation also featured a range of innovations including a global £10 billion ($20 billion) MTN programme that allows future issuance (both wrapped and unwrapped) and the first carving out of existing bondholders on a WBS.

Launched to refinance the acquisition of Thames in 2006 by Kemble Water (a special purpose company owned by a variety of Macquarie infrastructure funds), joint bookrunners Barclays Capital, Dresdner Bank, HSBC and RBC Capital Markets did not manage to place the full £1.2 billion originally envisaged for the inaugural deal, but did find £900 milion of demand during the brief, private marketing process.

The refinancing also involved the migration of seven tranches of outstanding unsecured debt worth £2.005 billion into the ringfence.

Issuing vehicle Thames Water Utilities Cayman Finance offered five tranches of A3/BBB+ rated index-linked notes with secondary market wraps from three monoline insurers.

The £350 million 2062 bond and the £200 milion 2057 notes were wrapped by Financial Security Assurance, the £200 million 2049 paper and the £100 million 2047 bond by FGIC, while XL Capital wrapped the £50 million 2042 notes. The bonds paid a coupon of 1.76%, 1.771%, 1.819%, 1.846% and 1.98% respectively.

At about 70%, initial leverage, Thames' deal was lower than for other utilities that have turned to securitisation, reflecting the risks involved in the company's high capital expenditure requirement.

Thames aims to spend £3.1 billion in the current regulatory period, which runs to April 2010. Further issuance can take leverage to a maximum of 87% after 2010 through the issuance of class 'B' notes, rising to 90% if the volume of unsecured debt outstanding falls below 0.8% of the regulated asset value.

Other financial covenants include a cash lock up triggered by drawings on debt service or operating and maintenance reserves, or if the class 'A' bonds fall below investment grade.

A second layer of covenants, triggering a complete stop on distributions and the involvement of the security trustee, occurs among other things if the debt to RAV limits are breached, if the adjusted class 'A' interest cover ratio falls below 1.3 or the senior ICR falls below 1.0, if Thames's capex is 10% higher than the regulator's determination, or if liquidity is insufficient to meet capex or interest for the next 12 months.

Thames Water Utilities Cayman Finance
Status: Issued August 2007
Description: Record volume UK whole business securitisation
Issuer: Thames Water
Bookrunners: Barclays Capital, Dresdner Bank, HSBC, RBC Capital Markets
Monolines: FSA, FGIC, XL Capital
Issuer legal counsel: Linklaters
Arranger legal counsel: Clifford Chance