When inexperienced debt turns brown | USAEMALL.com

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With Thames Water still circling the drain of renationalisation, a look at the utility’s previous green bond offerings might seem needlessly scatological.

But this is Thames Water we’re talking about, simultaneously the UK’s largest privatised water company, a prolific sewage spiller and, remarkably, the country’s third-biggest corporate issuer of green debt (behind HSBC and energy group SSE).

Thames Water’s heft here means its multiple credit downgrades in September (Moody’s said the company’s new “junk” rating was thanks in part to the presence of high environmental, social and “very high” governance risks) have “dragged down considerably” the overall creditworthiness of the wider UK corporate green bond portfolio, writes Kevin Leung at the Institute for Energy Economics and Financial Analysis.

Funds raised through Thames Water’s 10 green offerings since 2018 account for almost one-fifth of the £19bn of total senior debt spread across its main debt entities.

These green bonds — which have supposedly strict “use of proceeds” requirements baked in — rank pari passu to the utility’s vanilla securities. This means the dear, sweet investors who own Thames Water’s green debt are just as exposed to the company’s dire financial situation as its other creditors. Sucks to suck.

Thames’s 10 green bonds fit into two categories, according to the Anthropocene Fixed Income Institute: those issued between 2018 and 2020, and those issued in 2022 and 2023.

The first batch were issued under the company’s ‘green bond framework’ and funds raised seem to have contributed to some worthy-sounding projects, the AFII notes:

The proceeds were used for water management and water recycling projects with a reduced climate footprint. (e.g. water and wastewater treatment works, water and wastewater network, renewable energy). Work on these started in April 2015. Proceeds of GBP 779mm were used primarily for the refinancing of networks projects (GBP 580mm) and, to a lesser extent, treatment projects (GBP 199mm).

One project financed this way was the Deephams sewage treatment works. This project is an important contributor to key performance indicators (KPIs), according to impact reports. The latest report highlights energy generated (MWh), CO₂ equivalent emissions saved (kg), water saved (Ml/day) and effluent discharge prevented (Ml) as key metrics. 

Thames Water’s second batch of green bonds raised roughly €2.8bn. Despite the utility’s pledge to “provide transparency, disclosure, integrity and quality in our Green Bond reporting,” the AFII says it found “no public allocation or impact report for these issuances.”

The company’s latest Green Bond Impact Report was for the year 2020/21. Totally unrelatedly, academics at NYU’s Stern School of Business found in a study published last month (covered by Robin) that the vast majority of green bond proceeds are used for refinancing ordinary debt.

All four of Thames Water’s most recent green bonds are trading between 75 and 80 cents in the euro, reflecting investors’ pretty justified concerns about a credit event in the next few months.

“The troubles in the water sector send a warning,” Leung concludes. “The consequences of under-investing in climate mitigation and adaptation will be far-reaching in the years ahead. To prevent these — and in turn the costs of a disorderly transition — concrete policies and strategies require system thinking and swift actions.”

Further reading:
— Thames Water seeks up to £3bn in emergency loans from creditors (FT)
— Tory treasurer’s water company in discussions to take stake in Thames Water (FT)