British water and power firms are trying to soothe nerves over nationalisation in the event of a Labour government, although some fund managers and lawyers doubt so-called Corbyn-proofing will work.
Jeremy Corbyn has said the state would take control of water, electricity, gas and railway operators, as well as the Royal Mail and the Royal Bank of Scotland if Labour wins power.
The privatisation of utilities, which began in the 1980s under Margaret Thatcher, has been a divisive issue. While supporters say consumers get a better deal, critics argue that there is no place for profit in public services.
Now, with Labour gaining in the polls and a general election seen as more likely following a delay to Brexit, companies and investors are taking the possibility of nationalisation seriously.
Thames Water, for example, added a clause to its bonds to ensure holders are repaid immediately should it be nationalised.
Bankers say this reflects demand for extra protection as investors grow more wary about British utilities.
While references to nationalisation as a default event for utility companies are not new, several lawyers say they are seeing a surge in company enquiries about inserting such clauses, as well as an increase in investment firms seeking advice.
Reuters reported last year that many foreign pension and investment funds were opting to shift their stakes in UK utilities to jurisdictions such as Hong Kong, where bilateral treaties protect against asset expropriation. Lawyers say this process is continuing.
“Your biggest fear as a bond investor is if your bond gets nationalised for less than market value,” Dan Neidle, partner at Clifford Chance, says.
“Labour have said they will honour the debts of nationalised businesses, but a large number of investors and infrastructure businesses remain concerned. The discussions we are having are increasing over time,” Neidle adds, without giving any names.
Some companies began seeing higher borrowing costs last year.
“We have seen some foreign investors hold their hands up and say we are not looking at UK infrastructure,” says one London-based banker. “There were a lot of questions about Corbyn on the roadshow.”
But can investors really insure against nationalisation?
Some say a Labour government could simply change the law to annul a Thames Water-type provision and swap any cash due for government-issued gilts.
“It is probably impossible to ‘Corbyn-proof’ a corporate’s debt in this way,” one capital markets lawyer says.
Harry Richards, who co-manages Jupiter Asset Management’s Corporate Bond Fund, says that whatever it may say before an election, a Labour government may ultimately not want to risk undermining business confidence with a change to the law.
“Historically the UK has been viewed as a bit of a golden child in terms of enforceability of UK law and how the UK law is valued … it would very much undermine that.”
Nevertheless, Richards went underweight in British utilities midway through last year, arguing that nationalisation risk means they are no longer a safe bet.
Another factor which may make Labour think twice about a wide nationalisation plan is the expense.
S&P Global puts the cost of taking the water and power sectors back into state hands at some £160bn, based on the regulated asset value of the companies.
A Labour Party spokesperson said: “The benefits of taking water into public ownership are clear: ending rip-off prices and excessive dividends for private companies and investing in the long-term future of our economy.”
While it is difficult to disentangle the Corbyn effect on share and debt prices from the impact of Brexit or regulatory squeezes, analysts say it is definitely there among utilities, which comprise about a fifth of the UK corporate bond market.
Credit Suisse strategist Mark Freshney notes shares in utilities fell by about 35 per cent in the nine months after Labour outlined its plans in May 2017.
“The nationalisation debate has taken something like 10-15 per cent off the share prices,” Freshney says. “At the moment there is probably a 5-7.5 per cent discount in the shares.”
Any Corbyn discount is most visible in bonds issued in a holding company structure often used by utilities to raise debt.
These “holdcos” are unsecured, lack operating licences and assets and their bonds rank lower than the operating companies, known as “opcos”.
Jonathan Constable, an analyst at Legal & General Investment Management, estimates that UK-regulated opco debt is in the region of £70-100bn, and holdco debt – the most vulnerable category – equates to just 5 per cent of that.
1/11 He called Hezbollah and Hamas ‘friends’
True. In a speech made to the Stop the War Coalition in 2009, Mr Corbyn called representatives from both groups “friends” after inviting them to Parliament.
He later told Channel 4 he wanted both groups, who have factions designated as international terror organisations, to be “part of the debate” for the Middle East peace process.
“I use (the word ‘friends’) in a collective way, saying our friends are prepared to talk,” he added.
“Does it mean I agree with Hamas and what it does? No. Does it mean I agree with Hezbollah and what they do? No.”
Reuters
2/11 ‘Jeremy Corbyn thinks the death of Osama bin Laden was a tragedy’
Partly false. David Cameron used this as a line of attack at the Conservative Party conference but appears to have left out all context from Mr Corbyn’s original remarks.
In an 2011 interview on Iranian television, the then-backbencher said the fact the al-Qaeda leader was not put on trial was the tragedy, continuing: “The World Trade Center was a tragedy, the attack on Afghanistan was a tragedy, the war in Iraq was a tragedy.”
3/11 He is ‘haunted’ by the legacy of his ‘evil’ great-great-grandfather
False. A Daily Express exposé revealed that the Labour leader’s ancestor, James Sargent, was the “despotic” master of a Victorian workhouse.
Addressing the report at the Labour conference, Mr Corbyn said he had never heard of him before, adding: “I want to take this opportunity to apologise for not doing the decent thing and going back in time and having a chat with him about his appalling behaviour.”
4/11 Jeremy Corbyn raised a motion about ‘pigeon bombs’ in Parliament
This one is true. On 21 May 2004, Mr Corbyn raised an early day motion entitled “pigeon bombs”, proposing that the House register being “appalled but barely surprised” that MI5 reportedly proposed to load pigeons with explosives as a weapon.
The motion continued: “The House… believes that humans represent the most obscene, perverted, cruel, uncivilised and lethal species ever to inhabit the planet and looks forward to the day when the inevitable asteroid slams into the earth and wipes them out thus giving nature the opportunity to start again.” It was not carried.
5/11 He rides a Communist bicycle
False. A report in The Times referred to Mr Corbyn, known for his cycling, riding a “Chairman Mao-style bicycle” earlier this year.
“Less thorough journalists might have referred to it as just a bicycle, but no, so we have to conclude that whenever we see somebody on a bicycle from now on, there goes another supporter of Chairman Mao,” he later joked.
6/11 ‘Jeremy Corbyn will appoint a special minister for Jews’
False so far. The Sun report in December was allegedly based on a “rumour” passed to the paper by a Daily Express columnist who has written pieces critical of the Labour leader in the past. The minister did not materialise in his shadow cabinet.
7/11 ‘Jeremy Corbyn wishes Britain would abolish its Army’
False. Another gem from The Sun took comments made at a Hiroshima remembrance parade in August 2012 where Mr Corbyn supported Costa Rica’s move to abolish it armed forces.
“Wouldn’t it be wonderful if every politician around the world…abolished the army and took pride in the fact that they don’t have an army,” he added.
The caveat that “every politician” must take the step suggests Mr Corbyn does not support UK disarmament just yet.
8/11 Jeremy Corbyn stole sandwiches meant for veterans
False. The Guido Fawkes blog claimed that the Labour leader took sandwiches meant for veterans at at Battle of Britain memorial service in September but a photo later emerged showing him being handed one by Costa volunteers, who later confirmed they were given to all guests.
9/11 He missed the induction into the Queen’s privy council
True. After much speculation about Mr Corbyn’s republican views and willingness to bow to the monarch, his office confirmed that he did not attend the official induction to the privy council because of a prior engagement, but did not rule out joining the body.
10/11 Jeremy Corbyn refuses to sing the national anthem.
Partly true. The Labour leader was filmed standing in silence as God Save the Queen was sung at a Battle of Britain remembrance service but will reportedly sing it in future.
Mr Corbyn was elusive on the issue in an interview, saying he would show memorials “respect in the proper way”, but sources said he would sing the anthem at future occasions.
11/11 He is a member of the All-Party Parliamentary Group for Cheese
True. The group lists its purpose as the following: “To increase awareness of issues surrounding the dairy industry and focus on economic issues affecting the dairy industry and producers.”
1/11 He called Hezbollah and Hamas ‘friends’
True. In a speech made to the Stop the War Coalition in 2009, Mr Corbyn called representatives from both groups “friends” after inviting them to Parliament.
He later told Channel 4 he wanted both groups, who have factions designated as international terror organisations, to be “part of the debate” for the Middle East peace process.
“I use (the word ‘friends’) in a collective way, saying our friends are prepared to talk,” he added.
“Does it mean I agree with Hamas and what it does? No. Does it mean I agree with Hezbollah and what they do? No.”
Reuters
2/11 ‘Jeremy Corbyn thinks the death of Osama bin Laden was a tragedy’
Partly false. David Cameron used this as a line of attack at the Conservative Party conference but appears to have left out all context from Mr Corbyn’s original remarks.
In an 2011 interview on Iranian television, the then-backbencher said the fact the al-Qaeda leader was not put on trial was the tragedy, continuing: “The World Trade Center was a tragedy, the attack on Afghanistan was a tragedy, the war in Iraq was a tragedy.”
3/11 He is ‘haunted’ by the legacy of his ‘evil’ great-great-grandfather
False. A Daily Express exposé revealed that the Labour leader’s ancestor, James Sargent, was the “despotic” master of a Victorian workhouse.
Addressing the report at the Labour conference, Mr Corbyn said he had never heard of him before, adding: “I want to take this opportunity to apologise for not doing the decent thing and going back in time and having a chat with him about his appalling behaviour.”
4/11 Jeremy Corbyn raised a motion about ‘pigeon bombs’ in Parliament
This one is true. On 21 May 2004, Mr Corbyn raised an early day motion entitled “pigeon bombs”, proposing that the House register being “appalled but barely surprised” that MI5 reportedly proposed to load pigeons with explosives as a weapon.
The motion continued: “The House… believes that humans represent the most obscene, perverted, cruel, uncivilised and lethal species ever to inhabit the planet and looks forward to the day when the inevitable asteroid slams into the earth and wipes them out thus giving nature the opportunity to start again.” It was not carried.
5/11 He rides a Communist bicycle
False. A report in The Times referred to Mr Corbyn, known for his cycling, riding a “Chairman Mao-style bicycle” earlier this year.
“Less thorough journalists might have referred to it as just a bicycle, but no, so we have to conclude that whenever we see somebody on a bicycle from now on, there goes another supporter of Chairman Mao,” he later joked.
6/11 ‘Jeremy Corbyn will appoint a special minister for Jews’
False so far. The Sun report in December was allegedly based on a “rumour” passed to the paper by a Daily Express columnist who has written pieces critical of the Labour leader in the past. The minister did not materialise in his shadow cabinet.
7/11 ‘Jeremy Corbyn wishes Britain would abolish its Army’
False. Another gem from The Sun took comments made at a Hiroshima remembrance parade in August 2012 where Mr Corbyn supported Costa Rica’s move to abolish it armed forces.
“Wouldn’t it be wonderful if every politician around the world…abolished the army and took pride in the fact that they don’t have an army,” he added.
The caveat that “every politician” must take the step suggests Mr Corbyn does not support UK disarmament just yet.
8/11 Jeremy Corbyn stole sandwiches meant for veterans
False. The Guido Fawkes blog claimed that the Labour leader took sandwiches meant for veterans at at Battle of Britain memorial service in September but a photo later emerged showing him being handed one by Costa volunteers, who later confirmed they were given to all guests.
9/11 He missed the induction into the Queen’s privy council
True. After much speculation about Mr Corbyn’s republican views and willingness to bow to the monarch, his office confirmed that he did not attend the official induction to the privy council because of a prior engagement, but did not rule out joining the body.
10/11 Jeremy Corbyn refuses to sing the national anthem.
Partly true. The Labour leader was filmed standing in silence as God Save the Queen was sung at a Battle of Britain remembrance service but will reportedly sing it in future.
Mr Corbyn was elusive on the issue in an interview, saying he would show memorials “respect in the proper way”, but sources said he would sing the anthem at future occasions.
11/11 He is a member of the All-Party Parliamentary Group for Cheese
True. The group lists its purpose as the following: “To increase awareness of issues surrounding the dairy industry and focus on economic issues affecting the dairy industry and producers.”
“We have a preference for opco debt, which is safer in a nationalisation event, it could be viewed as a government proxy in event of a nationalisation, in which case the price could go up,” Jupiter’s Richards says.
This dichotomy is visible in bonds from Anglian Water and its holdco Osprey Finance. Similarly, Kelda Finance has seen its bonds underperform that of its opco Yorkshire Water.
“It’s largely down to people refusing to invest as long as the nationalisation overhang is there,” says Constable.
Reuters