聚焦控股公司/中间公司债务：春季大扫除2.0控股公司和中间公司债务风险似乎日益增加

UK Water All eyes on HoldCo/MidCo debt Latest developments around Southern Water act as areminder of the need to deleverage and simplify capitalstructures within the UK water sector. The upcomingconclusions of the Independent Water Commission are likelyto cover this financial equilibrium dimension. Franck Bataille+33 (0) 14458 3221franck.bataille@barclays.comBBI, Paris Parikshit Budhe+ 91 (0) 22 6175 1815parikshit.budhe@barclays.comBarclays, UK Spring cleaning 2.0: HoldCo and MidCo debt seemincreasingly at risk According to the Financial Times, 13 May 2025, Macquarie Asset Management (MAM), themajority shareholder (82% stake) of Southern Water (SW, Not covered; Figure 1) has asked theholders of HoldCo debt to take a full write-down for about £380mn, ahead of its planned equityinjection of around £900mn by June 2025. According to the same source, the holdco creditorsare not aligned with this burden-sharing proposal and are trying to negotiate a compromisesuch as a partial write-down. Beyond Holdco debt, the FT reports that SW's Midco creditors (c. £400mn of debt sittingbetween the HoldCo and OpCo box) could also face similar write-downs in future. Overall, asmentioned in the press article, this restructuring would allow MAM to inject all the new equityinto the operating company, instead of using a portion of it to service debt at the HoldCo/Midcobox. Not Covered: Barclays’ fundamental credit research team does not provide formal, continuouscoverage of this issuer and has not assigned a rating to the issuer or its debt securities. Anyanalysis, opinion or trade recommendation provided on a Not Covered issuer or its debt securitiesis valid only as of the publication date of this report and there should be no expectation thatadditional reports relating to the Not Covered issuer or its debt securities will be publishedthereafter. FIGURE 1. Southern Water Group organisational structure Source: Company reports, Barclays Research As a reminder,afterbeing downgraded to HY by Moody's in November 2024, Southern Water(BBB- CWneg / Ba1 CWneg / BBB- Sta) is facing further potential downgrade while its bonddocumentation includes an event of default, unless waived, if its senior secured debt rating isbelow investment grade at any two credit rating agencies. That said, Southern Water has beensuccessful in obtaining a waiver from its lenders when breaching financial trigger ratios such asminimum rating requirements in the past. Through such a restructuring, MAM is seeking to preserve SW's IG status, which is a keyrequirement for the UK Water Utilities to avoid a breach of its operating licence. As part ofPR24, Ofwat has signalled more firmly that “gearing levels that exceed 70% are above the levelthat is consistent with the need for a water company to meet the requirement of maintaininglong-term financial resilience". In this respect, it is worth keeping in mind that SW's OpCo is already running with a gearingratio above 70% (Figure 2). When consolidating HoldCo debt, MidCo debt, leases andderivatives, the gearing would even exceed 100% of SW's RCV (Figure 2). As a result, SW'scurrent capital structure seems incompatible with stricter AMP-8 requirements. Overall, SW's situation illustrates growing concerns over the 'Wholesale Business Securitisation(WBS)' model, where HoldCo/OpCo structures have been created to raise more debt whilekeeping the credit metrics of the regulated entity under control. In that respect, it is worthnoting that current valuations of SW's Class-A bonds (Figure 3) also reflect potential haircutdespite the upcoming equity injection and the ongoing talks on the Holdco/Midco debt write-down. As discussed in our latest cross-asset report (see UK Water: Rethinking the ownership modeland capital structure, 20 March 2025), we see a high probability that the Independent WaterCommission, whose recommendations should be made public in the coming weeks, would notonly discuss the ownership structure of the UK Water companies, but may also recommendsimplifying their capital structure when too many debt layers co-exist and lead to excessiveleverage. Sector read-across: still exposed to several movingparts Although the Final Determination (FD) put an end to contagion risk within the broader sector(Figure 4) and led to some improved rating visibility, we do not expect the UK Water sector toregain a defensive premium (Figure 4) anytime soon. Indeed, the record high level of CMA appeals (6 out of 16 companies), risk of further negativerating actions on some names, as well as uncertainties around Thames Water and SouthernWater, will continue to fuel volatile newsflow that may weigh on investor sentiment across theUK Water landscape. In addition, the Independent Water Commission may recommend more profound changes toownership and capital structure within the model, which may have implications on the overalldebt quantum and on some outstanding multiple debt layers. That said, the FD has been unfolding as