Investors are set to price in the perceived additional risk that comes with a competitive retail market, whereby a secure customer base and therefore a return is not guaranteed. This is coupled with the impact of slender margins which are expected to be less than 3.2 per cent.
Speaking to Utility Week, HSBC analyst Verity Mitchell said that “changing the risk will push up the cost of capital”. She also warned that if the returns are not attractive enough, “public investors will be quick to move elsewhere for better returns”.
RBS head of coverage and debt capital markets Richard Bartlett also sounded a warning for the industry. “Competition on the retail sector has to be handled carefully,” he told Utility Week, adding it could pose a risk to the financeability of the sector it is was not.
This view is echoed at by Moody’s associate managing director Neil Griffith-Lambeth, who said at Water UK’s City Conference last week that companies and their investors face “a world that is a less comfortable place”.
He added that under the non-competitive model “customer service didn’t matter and it was of little interest for debt investors” but now it will play an important role, adding more risk which will be priced into any finance agreements.
Wessex Water chief executive Colin Skellett, also speaking at the Water UK City Conference, warned that competition “is a big risk”.
He said “investors will start to get nervous” about competition, especially after Ofwat rung wholesale changes to the programme for the second time last month.
Skellett added that how investors will invest in companies is also set to change as a result of retail market reforms.
He said: “You have got investors who invest in the ground because it is a nice, safe investment and a nice place to get solid return.
“You have also got another set of investors who will invest in something that is a lot more competitive and risky – the retail business.”