Thames Water green bonds: all in the same puddle

10 minute read

Thames Water, a UK water company privatised in 1989, is running into financial difficulties. It is reported that under-investment in aged infrastructure, combined with surging inflation, has left the heavily indebted utility in a precarious position. This has resulted in poor trading of its bonds. It has £2.8bn green bonds, nearly 25% of its outstanding bonds, whose investors have lent capital for sustainable investment.

In this note, we analyse the current situation, and specifically the implications for green bond investors. In summary, both green bond and the majority of vanilla investors are secured in a Whole Business Securitisation (WBS) structure. This has reduced their spread widening compared to unsecured debt.

However, green bond investors are pari-passu with vanilla debt in a default, so they do not have a senior claim on green assets. They are exposed to the full operations of the issuer, not just the sustainable investments that their capital supported. The question for green bond investors is therefore whether the sustainability performance of the company as a whole is aligned to their objectives. Due diligence should consider the sustainability performance of the whole entity.