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Activist Elliott wades into Thames Water bonds

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US hedge fund Elliott Investment Management believes market participants are too pessimistic about the size of Thames Water’s debt pile and has built a position in the troubled utility company’s bonds, according to a report by the Financial Times.

The report cites people familiar with the matter as revealing that in recent weeks, Elliott, one of the world’s largest activist investors with about $65bn in assets, has been buying Thames Water’s bonds at a discount to face value.

When Thames Water — which supplies 16m people in London and the surrounding area, about a quarter of the population of England and Wales — defaulted on its debt earlier this month, the company suffered a sharp fall in its bond prices.

However, some of the company’s £16bn of top-ranking bonds, which fall within a so-called regulatory ring-fence, are currently trading at a little over 70 pence in the pound which, according to one of the FT’s source, is below the hedge fund’s worst-case expectations.

Under the terms of a potential government contingency plan to nationalise the business, £15bn of those bonds could face losses of just 5-10%, while an additional £1.3bn of class B debt could face steeper losses of 35-40%.

According to another FT source, the hedge fund believes that the debt could potentially make it out of the current crisis completely unscathed.

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