Corbyn-proof? British water and electricity companies take precautions of nationalization

LONDON (Reuters) – British companies in the water and electricity sector are trying to ease concerns about nationalization in the case of a Labor government, although some fund managers and lawyers suspect that Corbyn correction will work.

Jeremy Corbyn, the leader of the opposition, said the state would take control of British operators in the water, electricity, gas and railway sectors, as well as Royal Mail and Royal Bank of Scotland if the Labor Party gained power.

The privatization of public services, which began in the 1980s under Margaret Thatcher's curators, was a matter of contention. While supporters say consumers have a better price, critics say that there is no room for profit in utilities.

Now that unions are winning in polls and general elections are seen as more likely after Britain's departure for the European Union, companies and investors are taking the possibility of nationalization seriously .

Thames Water, for example, has added a clause to its obligations to ensure the immediate repayment of holders in case of nationalization.

Bankers say this reflects the demand for additional protection as investors are wary of British utilities.

Although references to nationalization as the default event for utilities are not new, several attorneys have indicated that they are witnessing an increase in the number of business surveys on the inclusion of such clauses, as well as an increase in the number of consulting firms asking for help.

Reuters announced last year that many foreign pension and investment funds were choosing to transfer their holdings in the UK public services to jurisdictions such as Hong Kong, where bilateral treaties protect against fraud. expropriation of badets. The lawyers said this process was continuing.

"Your biggest fear as an investor in bonds is that your bond is nationalized at a price below market value," said Dan Neidle, partner at Clifford Chance.

"The unions said they would honor the debts of the nationalized companies, but a large number of investors and infrastructure companies remain concerned. The discussions we have multiply over time, "said Neidle, without giving names.

Some companies began to see higher borrowing costs last year and a London-based financial markets banker put forward the case of Western Power Distribution, which has not been able to tighten prices in the United States. a £ 350 million bond in October.

"We have seen foreign investors raise their hands and say that we are not looking for British infrastructure," said the banker. "There were a lot of questions about Corbyn during the tour."

IMPOSSIBLE TASK?

But can investors really insure against nationalization?

Some say that a Labor government could simply change the law to cancel a Thames Water-like provision and exchange any money owed for gilts issued by the government.

"It's probably impossible to" protect Corbyn "from a debt of a company in this way," said a financial markets lawyer.

Harry Richards, co-manager of the Jupiter Asset Management Corporate Bond Fund, said that whatever he may say before an election, a Labor government may not want to risk undermining business confidence by amending the law.

"Historically, the UK has been perceived as a child of gold in terms of the enforceability of British law and the valorization of British law … that would greatly undermine that possibility."

Nevertheless, Richards was underweight the British public services in the middle of last year, arguing that the risk of nationalization meant that they were no longer a safe bet.

Another factor that might lead the Labor Party to think twice about a broad nationalization plan is spending.

S & P Global is charging states the cost of the recovery of the water and electricity sectors to around 160 billion pounds ($ 210 billion), based on the value of the regulated badets of the companies.

A Labor spokesperson said: "The benefits of public ownership of water are clear: end scams and excessive dividends for private companies and invest in the long-term future of our business. economy".

CORBYN DISCOUNT?

If it is difficult to dissociate the effect of Corbyn on stock prices and debt from Brexit's impact or regulatory pressures, badysts say that it does exist among utilities, which represent about one-fifth of the UK corporate bond market.

Credit Suisse strategist Mark Freshney noted that shares in utilities had fallen by around 35% in the nine months following the Labor Party's release of the plans in May 2017.

"The nationalization debate has reduced stock prices by 10 to 15 percent," Freshney said. "At the moment, there is probably a reduction of 5 to 7.5% on the shares."

Any haircut of Corbyn is particularly visible in bonds issued in a holding company structure often used by the public services to contract loans.

These "holding companies" are unsecured, lacking operating licenses and badets, and their bonds, such as those issued by Western, rank lower than those of operating companies, called "opcos".

Jonathan Constable, an badyst at Legal & General Investment Management, estimates that UK-controlled opco debt is between £ 70bn and £ 100bn, and that Holdco debt – the most vulnerable category – is only 5% .

"We have a preference for opco debt, which is safer in case of nationalization, and could be considered a substitute for the government in case of nationalization, in which case the price could rise," said Richards of Jupiter.

This dichotomy is visible in the links of Anglian Water and its holding company Osprey Finance. Similarly, Kelda Finance saw its bonds underperform those of its opco Yorkshire Water.

"It's largely up to people who refuse to invest as long as nationalism is out of date," Constable said.

Chart: Link 2026 Osprey (holdco) against Anglian (opco) (tmsnrt.rs/2Xiodng)

Chart: Daily bond yields vs Kelda Finance vs Yorkshire Water (tmsnrt.rs/2Xiu0cA)