Smoke on Southern Water

The loan backing the buyout of Southern Water has been mandated to Dresdner Kleinwort, HSBC, JP Morgan, NAB and RBS. It is believed to be for £750m, which would assume that the debt at the operating level is not being refinanced. The equity value of the company is said to be £1.4bn. Including existing debt, the deal values Southern Water at £4.2bn (€6bn).

Southern Water, which is the seventh-largest sewage and water company in England and Wales, was sold by RBS to the Challenger Infrastructure Fund of Australia and JPMorgan Asset Management. Its capital expenditure in the 2005–10 regulatory period will be around £1.56bn, a financing burden that observers expect to be borne in the bond market.

The loan facility backing the buyout is believed to have a structure similar to that used in the purchase of Thames Water, with the addition of “a slight premium, reflecting market changes”. Given that the facility size is far removed from the £4bn raised for the Thames Water sale in 2006, the similarity may not be that strong, and the pricing changes may be more than cosmetic.

The final shape of the Southern Water deal may also have far-reaching effects for the financing of other infrastructure asset sales, notably those of UUE and BEB Transport, which are both expected to change hands in the short-term.

Infrastructure has the obvious lure of steady cash flows and long-term market predictability, which means that it will sustain relatively high leverage.

These factors, together with a super-liquid market, have meant that investors have been willing to lend a great deal to fund infrastructure take-overs. Easy liquidity has, however, largely evaporated – even for assets on which there is a great deal of visibility. The loan for Southern, therefore, could prove a new benchmark, both in terms of the relatively small sum lent and in terms of pricing.

The Thames Water loan in 2006, which was mandated to Barclays, Dresdner Kleinwort, HSBC and RBC, included senior opco tranches at a starting price of 40bp, senior holdco loans with pricing ranging between 110bp and 160bp and a seven-year junior holdco tranche starting at 375bp over Libor, moving up to 500bp in years six and seven