Assured Guarantee has over $10 billion invested in troubled UK water companies

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New York-listed insurer Assured Guarantee has secured an investment of more than $10 billion in some of the UK’s most heavily indebted water utilities, underscoring how the risk in the troubled sector extends beyond the country’s borders.

If companies such as Thames Water and Southern Water default or fail to pay interest, the surety may have to pay the lenders. UK water utilities are £60 billion in debt under pressure from rising inflation and increasing regulatory scrutiny.

“We feel that the UK water company whose debt we have insured has a strong credit profile, as it provides an essential public service and is in a well-regulated industry where we offer senior level loan guarantees. all of which have an underlying investment grade rating,” Nick Proud, senior managing director at Assured Guaranty, said in an emailed statement. “To date, no UK water company has paid its debts.”

Assured Guarantee typically works with lenders financing US municipal government-backed infrastructure projects, providing insurance that pays back debt investors if the borrower defaults.

The products can help boost the credit rating of bonds and encourage lenders to support companies that might otherwise struggle to raise financing. When triggered, the insurance is structured to pay over time, indicating how the covered loans will be repaid.

However, according to results published in March, the group has invested around $1.9 billion in Thames Water alone, while Southern Water has its largest non-US exposure at $2.2 billion. The results show that Anglian Water, Yorkshire Water and Dure Cymru Welsh Water are all among their top 10 non-US holdings.

Assured Guarantee has been increasing its activity in the UK water sector over the past 18 months, striking a new deal in June to provide cover for Portsmouth Water’s creditors and last year agreeing to provide liquidity facilities to Yorkshire Water.

Ratings agency S&P has a negative outlook for almost two-thirds of UK water companies – indicating the potential for a downgrade if financial performance worsens.

The UK government is said to have discussed plans to put failing water companies into “special administration regime” with the Thames Water Front and the focus of the discussion following the abrupt departure of its chief executive last month.

UK water regulator Ofvat is closely monitoring the financial health of five UK companies – Thames Water, Southern Water, SES Water, Portsmouth Water and Yorkshire Water.

Thames Water, Southern Water and Yorkshire Water have secured commitments from shareholders in recent weeks to invest hundreds of millions of pounds in additional investment to shore up their finances.

The crisis prompted some lenders to Thames Water, England’s largest privatized water utility, to appoint consultants to assess their options if the business was placed into special administration.

“Our role has been to hold the hand of worried investors,” said Jennifer Marshall, partner at law firm Allen & Overy. “So far … there has been no default. At this stage, it is contingency planning and people are trying to understand their rights.

Fitch Ratings on Friday downgraded Southern Water’s credit rating by maintaining a negative outlook, noting a number of challenges for the business including “high interest costs and a long-term derivatives portfolio with significant mark-to-market liabilities” .

Assured Guarantee’s exposure to UK water companies is almost equal to the group’s total “claims-paying resources”, which stood at $10.8 billion at the end of March. Last year it reported a net income of $124mn.

Proud said Assured Guarantee has a “long history of successfully reducing potential losses”, and added that the group has maintained a “relatively stable level of claims paying resources over the past 15 years”.

The insurer enjoys strong credit ratings of AA and A1 from S&P and Moody’s, respectively, with the latter citing its “strong capital profile” and “conservative underwriting”.

So-called monoline insurers such as Assured Guarantee typically provide insurance to securities backed by governments, meaning it is unlikely that borrowers will default on their loans. In the US, its largest exposures included the state of New Jersey and the Port Authority of New York.

The products it sold were popular before the global financial crisis, but exploded after many providers wrote large amounts of insurance for securities backed by, among other things, subprime mortgages.