[KoolKat23]

It's interesting it's at the same rate, I imagine as everyone knows the government would have to bail them out. So the question remains why do it? It doesn't actually benefit the general public then. Increased risk for government and like you mentioned increased hurdles for running the utility.

Of course government do that, but they're left holding the bag regardless, so the incentive is very different.

These are not counterpoints.

[qcnguy]

Why do what? Have private water companies? Same reason for having private food supply, private electricity providers, private communication providers, and in most countries private healthcare providers. They run the business better than the state would, which is itself a benefit to the public.

A government bailout means nationalization, which means investors lose everything. That risk doesn't suppress interest rates, it increases them. Thames Water's interest costs are around average for corporate debt, implying the market doesn't anticipate a water nationalization anytime soon.

[KoolKat23]

Unlike the others this is a natural monopoly.

Your first message contradicts your second, which one is it are they paying government risk level interest rates or business risk level interest rates.

Edit: I just went and looked up their rating with one of the big agencies. CCC rated (junk basically) with a negative outlook, they did get an upgrade on a refinance last year, but from CC (so now lesser junk).

UK's last rating was AA (if you're interested).

[qcnguy]

There's no contradiction. Thames and gilts both pay ~5.8% on average. This is about the same as "Baa" (moderate risk) corporate debt.

https://fred.stlouisfed.org/series/BAA

Thames' debt costs are normal for a company of its type, but for a government this bond yield is danger-level high. That's why there's so much talk in financial circles now about the UK needing another IMF bailout, although I have grave doubts about whether that's actually possible given the sheer size of the UK's debt load compared to the smaller third world countries that normally need IMF help, and the near simultaneous talk in France of a bailout there too. The IMF just doesn't have the resources for even one bailout of that size, let alone two.

Don't pay attention to credit ratings of countries vs companies. They aren't comparable due to political interference and general crapitude at the ratings agencies (remember they rated sub-prime mortgage debt as AAA). They also disagree, S&P rates Thames' class A bonds as Caa3. What really matters is the yield. That's the ground truth.

Note that Thames' interest costs have been all over the place. 5.8% is the current amount it's paying, but the actual bonds it has issued have had a wide range of yields.

The reason it's considered high for a government is because government debt should be much lower risk than a company. Governments can order banks to transfer everyone's savings to themselves, they can print money, they can prevent their citizens from leaving and seize all the assets... they can do things to raise money that would be considered incredibly evil and criminal if companies tried. And of course they can in principle set bond yields to whatever level they like by making the central bank or other financial institutions legally required to buy their debt.

That's why economics textbooks teach that government bonds are the lowest risk possible and so should have yields far below corporate debt.

In reality:

1. Governments can default on their debts just like companies do. History is full of such examples. Bond yields reflect that fact.

2. Governments can sell bonds that are inflation linked, so printing money isn't a way to escape those debts. The UK has an abnormally high amount of such debt that's inflation linked. The only way to pay them back is via cutting spending or increasing tax revenue, but the UK can't do the latter (recent tax rises have failed to come close to expected revenue increases) and can't do the former either because...

3. Governments can be prevented from paying their debts by law. Some countries have "debt brakes" or "debt ceilings" that can block the issuance of new debt to pay old debt, and in other cases (like the UK) the government may rely on ideologically extreme MPs who refuse to pass laws that bring spending in line with revenues.

So you add these things together and something that could in principle be a sure bet ends up looking as risky as an ordinary company.

[qcnguy]

Given that ratings agencies were brought up it's worth adding a bit more detail here.

Thames' debt is C-grade because it recently defaulted on its debt. How is that possible given that its debt servicing costs are not unusually high? Normally you'd expect interest costs to go up well before default. Well, on the surface level because it couldn't raise more money from investors to meet rising costs. It couldn't do that because Ofwat keep fining it for "underperformance" whilst also refusing to allow prices to catch up with where they used to be in the past. Investors refused to put more money in unless a 40% price rise was allowed by the government, but the government likes to boast it has forced prices 45% lower since the 1980s (in real terms). Government doesn't budge, investors go on strike = default = downgrade.

There was waste under state ownership but probably not half of every pound spent, which is what forcing prices to nearly halve would have required.

Under the Tories it seems to have been believed by investors that eventually Ofwat would be reigned in and the financial pressure on UK water companies would ease. That didn't happen, instead the Tories imploded and Labour won. Both ratings agencies say explicitly that this is the reason they consider Thames' outlook to be either stable (at best) or negative:

"We revised down our assessment of TWUL's business risk profile to satisfactory because we now consider that U.K. water companies will operate in a less supportive regulatory environment"

Less supportive regulatory environment is ratings-speak for "because we think the left will shaft Thames and its investors".

This outcome is the opposite of the fantasy being peddled in this thread where investors have been extracting great wealth from Britain. It's the opposite: investors are getting hosed by the government. They're literally losing the money they put into Thames Water because the government forced Thames to spend it all on making water artificially cheap in an unsustainable manner.

[KoolKat23]

Again Thanks, extremely interesting insight.

I'm not sure they're entirely to blame although I'm sure they've played their part.

Look at the shareholding changes (2011-2017 Macquarie) and dividend payout percentage. It seems the current shareholders were left holding the bag, and perhaps we should be pointing fingers at Macquarie. When they left the debt had been increased by £2bln. If you look at their dividend payout ratio, in most of the years it held the investment, this ratio is extraordinarily high. Perhaps they sucked this dry, necessitating a price increase. (Current shareholders have barely paid anything).

Capital expenditure has been flat, only really increasing in 2021-2024. Perhaps chickens coming home to roost?

[KoolKat23]

Very interesting thanks.

[qcnguy]

You're welcome!