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UK water and energy firms attempt to ‘Corbyn-proof’ themselves against nationalisation

With Labour gaining in polls and a general election looking more likely, investors and utilities are taking prospect of public ownership seriously

Virginia Furness
Monday 29 April 2019 09:15 BST
Britain's public finances worse than Gambia, Uganda and Kenya, because of privatisation, IMF finds

British water and power firms are trying to soothe nerves over nationalisation in the event of a Labour government, although some fund managers and lawyers doubt so-called Corbyn-proofing will work.

Jeremy Corbyn has said the state would take control of water, electricity, gas and railway operators, as well as the Royal Mail and the Royal Bank of Scotland if Labour wins power.

The privatisation of utilities, which began in the 1980s under Margaret Thatcher, has been a divisive issue. While supporters say consumers get a better deal, critics argue that there is no place for profit in public services.

Now, with Labour gaining in the polls and a general election seen as more likely following a delay to Brexit, companies and investors are taking the possibility of nationalisation seriously.

Thames Water, for example, added a clause to its bonds to ensure holders are repaid immediately should it be nationalised.

Bankers say this reflects demand for extra protection as investors grow more wary about British utilities.

While references to nationalisation as a default event for utility companies are not new, several lawyers say they are seeing a surge in company enquiries about inserting such clauses, as well as an increase in investment firms seeking advice.

Reuters reported last year that many foreign pension and investment funds were opting to shift their stakes in UK utilities to jurisdictions such as Hong Kong, where bilateral treaties protect against asset expropriation. Lawyers say this process is continuing.

“Your biggest fear as a bond investor is if your bond gets nationalised for less than market value,” Dan Neidle, partner at Clifford Chance, says.

“Labour have said they will honour the debts of nationalised businesses, but a large number of investors and infrastructure businesses remain concerned. The discussions we are having are increasing over time,” Neidle adds, without giving any names.

Some companies began seeing higher borrowing costs last year.

“We have seen some foreign investors hold their hands up and say we are not looking at UK infrastructure,” says one London-based banker. “There were a lot of questions about Corbyn on the roadshow.”

But can investors really insure against nationalisation?

Some say a Labour government could simply change the law to annul a Thames Water-type provision and swap any cash due for government-issued gilts.

“It is probably impossible to ‘Corbyn-proof’ a corporate’s debt in this way,” one capital markets lawyer says.

Harry Richards, who co-manages Jupiter Asset Management’s Corporate Bond Fund, says that whatever it may say before an election, a Labour government may ultimately not want to risk undermining business confidence with a change to the law.

“Historically the UK has been viewed as a bit of a golden child in terms of enforceability of UK law and how the UK law is valued ... it would very much undermine that.”

Nevertheless, Richards went underweight in British utilities midway through last year, arguing that nationalisation risk means they are no longer a safe bet.

Another factor which may make Labour think twice about a wide nationalisation plan is the expense.

S&P Global puts the cost of taking the water and power sectors back into state hands at some £160bn, based on the regulated asset value of the companies.

A Labour Party spokesperson said: “The benefits of taking water into public ownership are clear: ending rip-off prices and excessive dividends for private companies and investing in the long-term future of our economy.”

While it is difficult to disentangle the Corbyn effect on share and debt prices from the impact of Brexit or regulatory squeezes, analysts say it is definitely there among utilities, which comprise about a fifth of the UK corporate bond market.

Credit Suisse strategist Mark Freshney notes shares in utilities fell by about 35 per cent in the nine months after Labour outlined its plans in May 2017.

“The nationalisation debate has taken something like 10-15 per cent off the share prices,” Freshney says. “At the moment there is probably a 5-7.5 per cent discount in the shares.”

Any Corbyn discount is most visible in bonds issued in a holding company structure often used by utilities to raise debt.

These “holdcos” are unsecured, lack operating licences and assets and their bonds rank lower than the operating companies, known as “opcos”.

Jonathan Constable, an analyst at Legal & General Investment Management, estimates that UK-regulated opco debt is in the region of £70-100bn, and holdco debt – the most vulnerable category – equates to just 5 per cent of that.

“We have a preference for opco debt, which is safer in a nationalisation event, it could be viewed as a government proxy in event of a nationalisation, in which case the price could go up,” Jupiter’s Richards says.

This dichotomy is visible in bonds from Anglian Water and its holdco Osprey Finance. Similarly, Kelda Finance has seen its bonds underperform that of its opco Yorkshire Water.

“It’s largely down to people refusing to invest as long as the nationalisation overhang is there,” says Constable.


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