CR-2025-005763 and CR-2025-005674 - [2025] EWHC 2318 (Ch)

Fecha: 02-Sep-2025

BACKGROUND AND OVERVIEW OF THE SCHEMES

BACKGROUND AND OVERVIEW OF THE SCHEMES

The relevant commercial background

Because of the limited nature of the questions I have to consider at today’s hearing, I set out the background to the Schemes, and their proposed terms, at a high level in sufficient detail only to enable me to consider those questions.

Both SWS HoldCo and the MidCo Scheme Company are part of a group of companies (the “Group”) that carries on the Southern Water business of supplying water and sewerage services to customers in various regions in the southeast of England. The Group is divided into three subgroups:

The “WBS Group” with “WBS” standing for “whole-business securitisation”. The WBS Group includes Southern Water Services Limited (“SWS OpCo”), which is the company that carries on the Southern Water business. The WBS Group has in issue a large number of debt instruments together with associated derivatives and hedging instruments to which I refer generically as “debt” without distinguishing between true debt and derivatives unless the distinction matters. The debt instruments are not issued by SWS HoldCo itself, but are issued by various other members of the WBS Group. The returns on the debt instruments are intended to be paid out of revenues generated by SWS OpCo’s business. The WBS Group’s financial obligations are secured on substantially all assets of the WBS Group. As is typical with securitisations, legal and practical steps are taken to ring-fence the WBS Group from other liabilities so that holders of the Group’s financial obligations can look to revenues generated by SWS OpCo and its affiliates without other liabilities intruding.

The MidCo Group sits above the WBS Group in the structure of the Group. The MidCo Group includes the MidCo Scheme Company and has been described as an “outcome taker” that is reliant on returns generated by the WBS Group for its financial wellbeing generally, and in particular its ability to pay its debt.

Above the MidCo Group, there is the HoldCo Group, which I do not need to say much about in today’s judgment.

The equity in the Group is held by Macquarie Asset Management and its affiliated investment funds, (together “the Sponsor”).

The performance of the Southern Water business is important to all of these subgroups, and indeed to the Sponsor. SWS OpCo is not said to be in any immediate financial distress, but its performance in recent years has been lacklustre and no dividends have been paid upstream by SWS OpCo since July 2022.

SWS OpCo is regulated by the Water Services Regulation Authority (“OFWAT”). On 11 July 2024, OFWAT said that it had rejected SWS OpCo’s business plan. OFWAT will not permit SWS OpCo to raise prices by as much as SWS OpCo requests. That decision is the subject of challenge but, as matters stand, SWS OpCo considers that it needs new money from somewhere to permit it to honour its regulatory obligations.

The Sponsor is, in principle, prepared to make the new money available by way of equity injection into the WBS Group. It has entered into an equity injection commitment agreement. However, that agreement is conditional and is subject to at least the following important conditions:

The Sponsor requires some debt of the HoldCo Group to be converted into equity. Some of that debt is under the Sponsor’s control, and I am told that agreement has been reached on that element of the restructuring.

There be an amendment and extension to the debt of the MidCo Group. That is what the MidCo Scheme seeks to achieve.

That terms of debt issued out of the WBS Group are amended so as to prevent a “Ratings Downgrade” from constituting an event of default in relation to that debt. That is what the SWS Scheme seeks to achieve.

10.

Both the MidCo Scheme Company and SWS HoldCo consider that giving effect to these conditions would result in a good outcome, both for the companies and for their creditors. In essence they consider that the Sponsor’s terms represent a good deal for creditors as they enable the WBS Group to obtain much-needed money as equity which is subordinated to the rights of existing creditors. That, both companies believe, would benefit both the WBS Group and the MidCo Group, given its position as an “outcome taker”.

The SWS Scheme

11.

The SWS Scheme seeks to prevent a “Ratings Downgrade” from triggering an event of default in connection with debt, governed by a common terms agreement, that is issued by members of the WBS Group. As matters stand, there would be a “Ratings Downgrade” if any two credit rating agencies downgrade debt of “Class A” bonds issued out of the WBS Group to below investment grade. Mr Ledger’s evidence is that that such an event of default is no longer market standard and operates as something of a hair trigger, since it could result in a default being called, even if the WBS Group is in no financial distress, simply because the rating agencies are influenced by market sentiment relating to businesses such as that of SWS OpCo.

12.

There is a myriad of debt that is affected by the SWS Scheme, which I call the “SWS Scheme Debt”. None of it, as I have explained, is issued by SWS HoldCo itself. Rather, it is issued by SWS OpCo, SW (Finance) II Limited (“DebtCo”), and SW (Finance) I plc (“BorrowerCo”). I refer to the holders of that together as “SWS Scheme Creditors” and the issuers of it together as the “SWS Borrowers”.

13.

Other amendments to the terms of the SWS Scheme Debt are being sought, outside the SWS Scheme, on a consensual, bilateral, contractual basis.

14.

The SWS Scheme Debt is guaranteed by various additional obligors, including SWS HoldCo. On 4 August 2025, SWS HoldCo executed a deed of contribution in favour of the SWS Borrowers (the “Deed of Contribution”). The Deed of Contribution entitled the SWS Borrowers to seek a contribution from SWS HoldCo if the SWS Borrowers had to make payment under the SWS Scheme Debt. That is intended to ensure that the SWS Scheme can effect changes to the obligations of the SWS Borrowers as well as of SWS HoldCo itself. It uses a technique that was considered in cases such as Re Swissport Fuelling Limited [2020] EWHC 3413 (Ch).

15.

The proposal is that the various holders of the SWS Scheme Debt vote in four classes pursuant to the SWS Scheme. Those classes have been constructed by grouping together various constituents of the SWS Scheme Debt by reference to their seniority. There are some 32 debt instruments comprised within the SWS Scheme Debt. There is not, therefore, one class per instrument. Rather, the four proposed classes are constructed by grouping together different debt instruments that are considered to have similar seniorities. The proposed classes are as follows:

Class A1 consists of debt due under two specific credit facilities. That debt is proposed to be in a class of its own because principal and interest rank senior to payments due on the other debt in Classes A2 to A4 referred to below.

Class A2 consists of counterparties under various swaps. Those debtors are in a class of their own because they are said to rank, in respect of certain of their claims, junior to Class A1 debt and senior to Class A3 and Class A4 debt considered below.

Class A3 and Class A4 debt ranks pari passu (and junior to both Class A1 and Class A2 debt). Class A4 debt, however, contains a provision, that Class A3 does not, entitling holders to receive a subordinated make-whole payment of the net present value of future interest following triggers of certain insolvency events. Class A4 debt is therefore perceived to carry rights that are sufficiently different from Class A3 debt to warrant being a separate class. There is a further quirk with the Class A4 debt in that some is guaranteed by a third party outside the Group called “Assured Guaranty” which I will address later when considering class composition.

16.

The terms applicable to all the SWS Scheme Debt are set out in a “Common Terms Agreement”. In essence, the SWS Scheme simply empowers a security trustee to execute an agreement to amend the Common Terms Agreement. That amendment will suspend the ability to call a “Ratings Downgrade” event of default in the first instance once the first tranche of the Sponsor’s money is received. Following receipt of the balance, the “Ratings Downgrade” event of default would be removed altogether.

17.

There are other administrative parties who play roles in relation to the SWS Scheme Debt such as agents, trustees and similar. Pursuant to the SWS Scheme, SWS Scheme Creditors give instructions to those administrative parties to do whatever is needed to give effect to the SWS Scheme. SWS Scheme Creditors have the right to give those instructions by virtue of contractual provisions that are already in existence and therefore exist outside the terms of the SWS Scheme. The SWS Scheme does not, therefore, impose obligations on administrative parties that are new. Rather, SWS Scheme Creditors agree to exercise their existing powers to impose obligations on the administrative parties. The administrative parties will also give undertakings, for example, to do what is necessary to give effect to the SWS Scheme. Again, the SWS Scheme does not impose those undertakings on the administrative parties who give their undertakings outside the SWS Scheme.

18.

In relation to the SWS Scheme, there has been a lock-up agreement. Any SWS Scheme Creditor is entitled to accede to that agreement. If they do so, they agree to vote in favour of the SWS Scheme and, by doing so, obtain entitlement to a payment of £1,000. As matters stand, 100 per cent of Class A1, approximately 98 per cent of Class A2, 100 per cent of Class A3, and approximately 63 per cent of Class A4 by value have signed up to the lock-up agreement.

19.

Finally, I note that SWS HoldCo accepts that it could conceivably seek to effect the amendments proposed to the definition of “event of default” otherwise than by means of a scheme of arrangement. It could do so, for example, contractually. Mr Ledger’s evidence is that this would be a cumbersome and unwieldy route that is inappropriate given the urgency with which the Group needs the Sponsor’s money.