Wessex sees strong demand for bond issue with premium

Wessex paid a 6.625% yield on its latest £250m September 2040 bond. The price (rated Baa1/BBB+ by Moody’s and Fitch) cost the company a premium of 0.125% on top of the bond’s 6.50% coupon, while a simultaneously issued £350m bond due in September 2034 — and paying a coupon of 6.125% — was priced to yield a slight premium of 6.292%.

Wessex had a tough Final Determination from Ofwat, including a 17% totex shortfall compared to its plans. It has therefore asked Ofwat for a reference to the CMA.

The yields on the Wessex bonds compare with the new real cost of debt for 2025-2030 allowance of 3.74% to which CPIH inflation is added. Although Ofwat assumes an AMP8 average of 2%, CPIH was running at 3.5% for November 2024 and outturned at 3.9% for January 2025.

Water debt demand continues to be robust, with Wessex attracting more than £2.45bn of orders at the respective pricing levels of Gilts +155 basis points (2034) and G+150bps (2040). 

Fitch comments on higher cost of debt

Yeshvir Singh, head of UK utilities at Fitch, said the agency assumes that water companies could face an appreciably higher average cost of debt than the FD figure — for all rating categories between A- and BBB- — with the number for the lower rating estimated at close to 7%.

Speaking on a webcast last week, Singh said that Fitch has consequently tightened its debt capacity limits for all ratings, with the agency’s gearing requirement for an A- rating in most cases now reduced by two percentage points, from 67% to 65%.

The rating agency also expects companies to face aggregate fines of £900m in AMP8 (£300m of which will be attributable to Thames Water alone), on top of £940m of Outcome Delivery Incentive (ODI) cash penalties over the period. Most of the fines will arise from sewage pollution incidents, Fitch predicts.

Thames is forecast to incur £342m of ODI penalties over AMP8, while Anglian is expected to have to pay £232m. The next two most penalised companies are projected to be Welsh Water (with £149m of penalties) and Southern Water (with £102m).