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Bond fund Pimco has already recorded a 17 per cent paper profit on its portion of a £3bn emergency loan that it and other lenders are set to provide to ailing utility Thames Water.
Several Pimco funds that hold chunks of the new debt marked its value 17 per cent higher than the amount they were set to invest, according to filings made last week to the US Securities and Exchange Commission for the end of last year.
The windfall for the $1.95tn-in-assets California-based asset manager highlights the instant profits that some of the US’s largest investment firms and hedge funds are expected to earn by extending an expensive lifeline to the near-insolvent utility.
News of the profit comes ahead of an appeal against the loan in the Court of Appeal, starting on Tuesday.
Thames Water, the UK’s largest water company with 16mn customers in and around London, last month sought approval from the High Court to borrow up to £3bn from its top-ranking “class A” creditors. Already struggling under £19.5bn of debt, the extra borrowing is designed to give it breathing room to raise equity from new investors and renegotiate its debts.
The court approved the deal, despite opposition from environmental activists and a rival group of lenders. However, in a final hurdle to the rescue loan, Liberal Democrat MP Charlie Maynard and the utility’s junior creditors are challenging the deal.
Alongside Pimco, the rescue loan is being provided by lenders including US hedge funds Elliott Management and Silver Point. The consortium is charging Thames Water an interest rate of 9.75 per cent plus other fees and sweeteners, which could in total cost the utility in excess of £800mn.
Even though the loan has not yet been finalised, bond investors have already been trading the debt on the basis that it gets approved. Some traders have quoted the debt at 112 per cent of face value.
Pimco’s accounts show it classes the loan as a Level 3 asset, meaning its valuation is based on factors other than market prices alone. Pimco declined to comment.
The timing of Pimco’s filings means that the asset manager recorded gains on the loan after committing to the financing package but before the new money had been approved by the High Court.
Justice Leech, the judge who approved the loan deal last month, said its interest rate was “very, very high” and the total costs of the financing package would leave customers “horrified”.
He added that “the immediate trading price” of the loan in the secondary market suggested that Thames Water “might have found better terms in the market from new funders”.
The deal offered by the senior class A creditors faced competition from a group of dissenting junior “class B” creditors, including London-based credit fund Polus Capital Management, that proposed its own £3bn financing package at a cheaper 8 per cent interest rate.
Maynard and others have argued that a temporary nationalisation of Thames Water under the government’s special administration regime would spare the utility from paying out hundreds of millions of pounds in interest and fees to lenders.
“Our case is strong and if it wasn’t strong we wouldn’t have been granted all four grounds for appeal that we asked for,” Maynard told the Financial Times of the appeal. He added that taking the case to the Supreme Court if the Court of Appeal went against him was “an option”.
Speaking after the judgment last month, the class A creditors said administration would “signal regulatory failure and impose billions in additional costs on UK taxpayers”.
