Thames Water’s bonds have crashed to a record low after the Environment Secretary said it was stepping up contingency plans for the struggling utility giant.
The price of Thames Water’s debt fell to as low as 67p on Friday, down from 70p at the start of the month, as investors took flight amid fears the Government could nationalise the business.
3% is a crash.
In something as illiquid as corporate bonds.
A special administration regime (SAR) would wipe out the bulk of Thames Water’s borrowings, although it would also leave the Government forced to foot the bill for its running costs.
You know what? It wouldn’t. The cram down would be of that debt which cannot be repaid. Not of all debt, but of that which it impossible to repay. Because a cram down of more than that would be straight out theft.
Further, the Tele here – and I suspect the conversation more generally – is missing the vital distinction between Thames Water debt – the regulated utility – and Kemble Water debt, the unregulated holding company. Kemble might well be toast. But that doesn’t wipe out the debts of the opco…..
To be fair, a 3p loss on 70p bond is a 4.3% loss 🙂
70p -> 67p is a drop of 4.3%
I don’t normally touch bonds because there isn’t an upside to them: best case you make your piddly coupon which probably won’t even keep you up with inflation, worst case you lose everything. All the drawbacks of cash without the liquidity.
To me, anything up to ±5% on a day on a single investment is just noise.
Matt, you don’t seem to understand corporate bonds very well – IG bonds have pretty good liquidity and, but trading them, you can often generate significant gains.
However, even holding them to maturity, corporate bonds can provide returns that have a decent upside over inflation. And if inflation is your major concern, then inflation-linked government and corporate bonds exists.
And there is much less downside risk than for equities.
However, they certainly do provide a very different payoff profile.