Offshore finance: water firms rise to the challenge

Following pressure from Ofwat and consumers, some water companies with offshore structures have agreed to close them in an effort “to rebuild public trust”. Suzanne Heneghan investigates.

Negative publicity surrounding offshore finance is nothing new. And those water companies with financial arrangements in such jurisdictions have faced criticism for years. Yet in recent months, a stream of revelations about the mysterious, private world of so-called tax havens has seen public mistrust rise to new levels.

Water companies who, despite protesting their arrangements have nothing to do with tax avoidance, have realised the time really has arrived to ship out on offshore.

Last week that pressure rose further when environment secretary Michael Gove delivered a barbed message to companies with interests in the Cayman Islands, at Water UK’s annual City Conference.

Rounding on those with complex offshore multiple subsidiaries and their slow progress at scrapping them, he said: “The stated reason was to enable smoother access to global bond markets.

“But the rules were changed and yet the offshore firms continue to exist. The companies concerned have maintained the structures that enable them, among other things, to avoid proper scrutiny. And scrutiny matters, because these companies have used their complex structures to play the system.”

In recent months, he noted, after pressure from the financial regulator and consumers, some water companies with offshore structures have agreed to close them “to rebuild public trust”.

But he told the conference: “…The companies, people in this room, have said it will take up to two years to wind up the Cayman operations, as it’s claimed it will take that long to contact international bond holders who may have made their investment a decade ago.

“Well that sort of excuse-mongering just will not wash with the public I’m afraid.”

Offshore companies

One of the companies he referenced was Yorkshire Water and the issue is something its director of finance, regulation and markets, Liz Barber, has long had to field.

In October at Moody’s 2017 UK Water Sector Conference, she announced the company’s plans to remove its “no longer necessary or appropriate” offshore banking arrangements, used to manage high levels of borrowing, as soon as possible.

Speaking later, she said: “Our offshore companies in the Cayman Islands have nothing to do with tax and, no matter how we try to explain, people just don’t understand them.”

In an interview with Utility Week a few days ahead of the City Conference, when asked if sorting out the Cayman issue was something the company was still taking seriously, she responded: “Absolutely, completely seriously.”
“It would be ideal if we could do this immediately, but it’s complicated.”

However, the company was now at the stage of “getting very strict regulatory clearances”. “We may have gone quiet, but we are very much working on this.”

Yorkshire’s Cayman holding company, she explained, had been made up of two subsidiaries. One, a “legacy” bond structure, is now ready to be paid off. The other, issues bonds.

The plan is to close the Cayman operations and set up a new UK issuing company. Any new bonds from now on will go through the UK process. Existing bonds will be moved into this for the meantime but, as soon as it can, the company aims to strike them off.

“The reason for the Cayman Islands was not for tax avoidance, it was never anything to do with tax, and despite us saying very regularly it was nothing to do with tax, people would say ‘well, we just don’t like it’.”

In fact, the activities of Yorkshire Water, she pointed out, contribute much to the public purse, providing approximately £100 million of revenue in the round to local authorities or the HMRC.

But why go offshore in the first place?

Around 2008, it was a way of temporarily underwriting external debt, with cross-guarantees, plus securitisation all in one place – although, as is being increasingly highlighted, this can now be offered elsewhere.

Daunting task

“It was commonplace at the time to go to a jurisdiction where you could do both of those things.”

Why then not change the historic offshore arrangements, involving around £4.5 billion in bonds, sooner?

Because it was, she explained, “a daunting task”. “It was a great big job to move.”

And also expensive, requiring “lots of experts and advisors”.

“We felt why go into it and spend a lot of money on it? At one level that’s understandable. But it goes back really to being about company legitimacy… You have to try harder.”

As the financial world has moved on, the pressure on those water companies with offshore arrangements continues to rise.

And while resisting sharing a timescale for the move, she revealed Yorkshire Water had summer in its sights.

“We can’t push third parties quicker than they can go.”
But, although it was “quite a stretch”, she said it was working very hard to get its Cayman Islands business removed and into a UK company by about the time of this year’s results, possibly mid-July.

“We can’t guarantee it, but that’s our desire.”

It is also responding in other ways and considering ethical, social bonds. “We firmly believe that although we may be financed in a corporate way we have a very strong ethos. We believe we are a company that cares about the community, service and environment.

“We are actively exploring that proposal later in the year. It needs working at, it’s not a slam dunk. But we really want to seriously explore social bonds.

“I think it would also be good for the industry.”