English water firms’ big debts of concern as interest rates rise, says expert

theguardian.com:

Water companies are struggling to hold their finances in order as interest rates rise on the huge debts they have taken on to pay dividends, according to a leading economist.

Dieter Helm, a professor of economic policy at the University of Oxford and an adviser to governments, said there were worrying signs from water companies about their financial stability as the economic crisis pushes up interest rates.

At privatisation in 1989, the nine English water companies were debt free. Between 1991 and 2019 they took on £52bn of debt, according to analysis. By last year debt had risen to £56.2bn, with Ofwat warning of concerns about the financial resilience of the sector.

Helm said rising interest rates on those huge debts now put these companies in a concerning situation. “In effect, the companies mortgaged their assets and then paid out the cash from the mortgaging in the form of dividends, share buybacks and special dividends. There followed the great financial engineering,” he said.

Last week Yorkshire Water announced an equity injection of nearly £1bn from the repayment of intragroup debt after Ofwat raised concerns over the fragility of its balance sheet and its ability to provide an essential public service. Shareholders were asked to provide an additional £100m to reduce spills from storm overflows.

Southern Water, which was fined £90m for discharging billions of litres of raw sewage into the sea, was rescued last year with a £1bn cash injection from Macquarie, the Australian asset manager.

Both companies have high levels of debt, with the ratio of company debt to equity at 77% for Yorkshire Water and 71% for Southern Water as of March 2021.

Helm said: “There are worrying signs from the companies, as they struggle to hold