Rating hitch delays Kielder deal

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Securitising the revenues from the reservoir will keep the regulator happy. But the rating agencies are taking their time.

Northumbrian Water has run into further hold-ups on the £220m bond issue that the company – and others – consider vital if it is to finance itself economically over the next five years.

Northumbrian and its adviser Deutsche Bank had originally hoped to launch the bond – which will securitise the water company's £15m-a-year contract with the Environment Agency to feed water into the Tyne, Tees, and Wear rivers when required – before the end of 2003.

However, the timetable slipped to end of January after Moody’s took considerably longer than expectedcomplete its initial analysis of the deal. The launch will now be postponed by at least four more weeks, following further delay on part of the rating agencies and concerns raised by the bond insurer over legal and taxation issues.

“We’re still shooting for the end of the month”, said Michael Redican, the managing director in debt capital markets at Deutsche who is structuring the deal. “We’re right in the final throes”, he added.

By the second week in February, only Fitch had confirmed a rating for the deal, although both Moody’s and Standard & Poor’s were expected to do so in time to meet an end-of-month launch.

The delays will have been a serious frustration for Northumbrian, which views the issue as the key element in its strategy to restore its own credit ratings from S&P and Fitch to the A-minus levels they were at in May, before a consortium led by Deutsche took over the water group.

Although the company was subsequently refloated, the acquisition left it with £160 million of additional bank debt that is secured by a pledge over the water company’s shares. Most of the proceeds from the bond issue will be used to redeem this.

Northumbrian also faces regulatory pressure over its ratings. Ofwat is worried that the present triple-B ratings may inhibit the water company’s ability to raise finance for its future capital investment programme and has given it until June to restore its ratings to the previous levels. If it does not, the regulator has indicated it will modify Northumbrian’s licence to strengthen the ring-fencing of the water company’s income from group debt-servicing obligations.

The difficulties encountered in launching the asset-backed bond and its importance to Northumbrian’s future operations – alongside other commercial considerations – have persuaded the participants to keep the terms confidential, and the bonds are likely to be placed privately.

“The company and ourselves have decided we want as little publicity on this as we can”, explained Redican. “There are some sensitivities to this deal”.