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The struggling UK utility Southern Water has secured investment worth up to £1.2bn in a deal led by its majority owner, Macquarie Group, that will help it avoid a breach of its regulatory licence.
A consortium led by Macquarie has committed to invest £655m, with a promise of another £245m by the end of the year from existing shareholders and unnamed new investors. Southern could receive another £300m depending on the outcome of a legal appeal to increase the amount it can charge customers.
Southern supplies Kent, Sussex, Hampshire and the Isle of Wight with water and sewage services. It needed to raise cash in order to avoid a downgrade on its debt rating that could have resulted in a breach of its licence to operate from Ofwat, the sector regulator in England and Wales.
Ofwat has allowed water companies to raise household bills steeply in order to invest billions of pounds over the next five years in infrastructure such as new pipes, water treatment works and reservoirs. Southern had already been allowed a 53% increase for its 4.7 million customers – the largest rise of any company – but it is appealing to the Competition and Markets Authority to charge more.
Southern in February said it would raise £900m from investors and that it expected “to conclude the process by the end of June 2025”. However, the process was only completed late on the last day of June after protracted negotiations between Australia-headquartered Macquarie and the holders of Southern’s most expensive debt.
Those creditors, the US investor Ares Management and the Australian investor Westbourne Capital, will have £415m in debt written off in exchange for taking part in the equity raise, according to a person close to the talks.
Southern is the latest UK water company to face severe financial pressures, and had net debt of £6.2bn at the end of March 2024. Macquarie has previously faced intense criticism from politicians over its record of ownership of Thames Water between 2006 and 2017, when Britain’s biggest water company built up large debts.
Macquarie sold the utility to buyers who have since lost all their investment. Thames Water’s creditors are negotiating with the government to avoid fines before injecting £5.3bn in new debt and equity that would see them formalise control of it – and avoid temporary nationalisation.
Southern’s parallel turnaround efforts had been complicated by its complex capital structure. Negotiations continued until Monday to agree the level of writedown on the debt.
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Securing the equity was crucial for Southern because it has already had its debt downgraded to “junk” status by Moody’s Investor Service, one of the trio of big credit rating agencies. Another of the three, S&P Global Ratings, has threatened to cut its rating if the equity raise is not successful. Ofwat requires an investment-grade rating from two of the big agencies.
Southern is majority-owned by Macquarie via a Jersey-incorporated vehicle called Greensands Holdings. The consortium putting up the £655m also includes existing investors. Other minority shareholders include funds controlled by JP Morgan, UBS and Federated Hermes.
Another consequence of the Moody’s rating agency downgrade was that Southern Water was blocked from making payments to the debt holders. Southern said that it would commit to paying no dividends during the 2025 to 2030 regulatory period.
