A recent report from Standard & Poor’s Ratings Services in tandem with recent M&A activity, and the repackaging of corporate debt likely to follow, suggests that interest in whole business securitisation in the UK water utility sector remains high.
William Ferara, a credit analyst at Standard & Poor’s said: “We expect to see further water securitisations emerging in the UK in 2007, and would expect future transactions to incorporate the same structural characteristics as the current rated securitisations to benefit from the same rating methodology.”
The report, “Exploring The Keys To Success For UK Water Corporate Securitizations”, outlines the structural features that support the securitisation of water utilities.
Traditional utility financing is typically carried out at an unsecured corporate level. UK utility whole business securitisations, on the other hand, incorporate a blend of corporate and structured finance techniques, but are structured closer to the corporate end of the lending spectrum.
The inability of lenders to take effective security over regulated assets in the UK means that credit agencies like S&P cannot rate through the insolvency of the operating business, which would be the case in a true securitisation.
Instead, the transactions are generally structured to minimize the probability of insolvency through a series of early warning signals enabling corrective action, and to lessen the likelihood of a special administrator being appointed.
Structural features typically include fixed and floating security on operating assets, structural payment subordination methods, dedicated liquidity reserves, a cash flow priority of payments, tight covenants, and strict limitations on business activities.
Ferara said: “As the ratings in UK water securitisations have shown, we consider that a package of structural elements can be effective in reducing default risk. The successfully structured transactions achieve a higher debt rating than would normally be possible for a straight corporate bond.”