Macquarie asked Ares to take full writedown on Southern Water debt

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Macquarie-controlled Southern Water asked Ares Management and other lenders to write off about £370mn of debt, in an effort to allow new equity to flow directly into the utility’s heavily-indebted operating company.

The talks place one of America’s largest private capital firms at the centre of the financing struggles at another debt-laden British water utility, just as Thames Water has secured an emergency loan from a group of creditors including US funds such as Elliott Management and Silver Point.

Southern — which provides water and sewerage services to 4.7mn customers in the south-east of England — asked bondholders including Ares Management and Australian infrastructure investor Westbourne Capital to write off all of their debt, according to people familiar with the matter.

The investors own debt at Southern’s holding company level, which has roughly £370mn of external bonds, according to the company’s most recent filings. The debt sits at the top of the capital structure and far away from the utility’s operating assets, making it risky for investors to hold.

Macquarie took a majority stake in Southern in 2021. The Australian investor and the lenders are negotiating a compromise of a partial writedown, but are yet to agree on terms. Macquarie’s demands are still too steep for lenders, according to people familiar with the discussions.

A request for a full writedown was an opening position, the people added.

Ares, which oversees nearly $550bn in assets, became a lender to Southern when it acquired AMP Capital’s infrastructure debt business in 2022. AMP became a lender to Southern in 2018.

Southern Water’s “midco” lenders, including Caisse de dépôt et placement du Québec, one of Canada’s biggest pension funds, could also face writedowns in the future. Those bondholders sit between the operating company debt and the bonds at the holding company.

Macquarie, Ares, Southern Water and CDPQ declined to comment. Westbourne Capital did not respond to a request for comment.

Southern’s finances are less fraught than those of Thames Water, which is the UK’s largest water utility and serves 16mn households. But the utility is heavily indebted and has come under pressure in debt markets amid concerns over its credit rating and the potential for debt covenant breaches.

Alongside the proposed haircut, Southern’s owner Macquarie Asset Management is injecting £900mn of fresh equity into the company.

The aim of a writedown is to allow Macquarie inject all of the new money into Southern’s operating company, rather than using a portion of it to service debt at the holding company level, according to people familiar with the matter.

Within Southern’s complex structure, the regulated operating company — a “ringfenced” group that is supposed to be protected from stress at the holding companies above — is nevertheless running with a debt to equity ratio of about 70 per cent.

After being downgraded to “junk” by rating agency Moody’s in November, Southern has been teetering on the verge of default and is struggling with rising borrowing costs across its more than £6bn debt pile.

The equity injection has cooled some of the market’s concerns around Southern, with the prices of its bonds recovering. Its “rating watch negative” status was removed by rating agency Fitch.

At the end of last year the utility borrowed £300mn by selling senior bonds at its operating company to a group of hedge funds at an annual interest rate of 7.75 per cent. In an indication of its difficulties raising capital, Southern used a private process primarily aimed at hedge funds for the bond sale.

The interest rates on the bond issued by Southern are nearly three times higher than Ofwat’s assumed cost of borrowing for the sector.