Thames Water - comment

The junior and short end of the bond curve is rallying this morning, while the long-dated Class A bonds are sinking. The latter, trading in the low 60s were not linked to RPI, would have upside if a new owner of Thames Water were to have to take them out. The former would have quite possibly seen 100% downside. The promised £750m incremental equity injection is subject to ostensibly manageable CPs and, we assume, is coordinated with Ofwat and the government - even though it falls short of their demands. Notional Gearing per March is 77.4%, 2.1% higher than our forecast and should drop just under 70% with the incremental investment. We see the company requiring another £750m into the next regulatory period, but perhaps a radical turnaround plan can at least save some of that.