Bonds backed by whole business cash flows from U.K. gas utilities are expected to hit the market for the first time as soon as this summer, according to lawyers. One deal is said to be close and more are apparently in the works. "We expect between two and four deals to come to market by the end of the year," said Julian Davies, partner at law firm Linklaters in London, who is working on a number of transactions but declined to provide any names.
Market analysts forecast each deal will be significantly smaller than the £1 billion-plus whole business deals done in the water sector, since gas companies are simply smaller.
One deal will come from an existing player in the industry looking for a cheaper way to fund capital expenditures, lawyers said, and other potential issuers include the three winning bidders for the £5.8 billion in gas distribution networks auctioned off last summer by National Grid Transco.
The most likely of the NGT bidders to refinance its debt, according to securitization analysts, is Macquarie, the Australian bank which picked up the Wales and the West of England Network for £1.2 billion. The other two consortia are thought to want to maintain lower levels of leverage. One includes U.K. gas company Scottish and Southern Energy, and Canadian funds Borealis Infrastructure Management and Ontario Teachers Pension Plan; the other is composed of Hong-Kong based energy investment company Cheung Kong Infrastructure, Li Ka Shing Foundation and U.K.-based United Utilities.
Tom Fallon, group treasurer at United Utilities, said the consortium has no immediate plans to do such a deal but will keep its options open.Karen Smith, spokeswoman for Macquarie, was out of the office and could not be reached, while Julian Reeves, spokesman for SSE, declined comment.
The activity in the gas utility sector is being driven in part by last summer's partial privatization of NGT, but equally important was the introduction through the Energy Act 2004 of the Energy Administration Order Regime last October, a special insolvency regime specific to the gas sector. "This regime is a protective regime similar to Chapter 11 in the U.S., and provides additional comfort to creditors in the event of insolvency at the utility," said Linklaters' Davies.
In addition, the maturing of the market for whole business securitizations in the water sector is providing comfort to issuers and investors alike. "In the water sector there was concern the regulator would lower prices based on the cost-of-capital reductions securitization afforded issuers, but at the last five-year review in December 2004, the regulator did not reset prices, demonstrating clear support for the sector," Davies observed.
