USS lends to Infracapital/Morgan Stanley water firm

In its second such deal, the UK pension fund is providing £95m of 20-year class B inflation-linked financing to Affinity Water, owned by Infracapital and Morgan Stanley.

The UK’s second-largest pension fund, Universities Superannuation Scheme (USS), has provided £95 million (€110 million; $150 million) of 20-year class B inflation-linked financing to UK water firm Affinity Water, the pension announced today.

The borrower, Affinity Water, is owned by Infracapital Partners and Morgan Stanley, which acquired the company last summer for £1.24 billion from French firm Veolia Environnement. The deal was made through a private placement, USS said.

Affinity Water informed the market yesterday that it has issued £480 million of bonds as part of its recently implemented £2.5 billion multi-currency bond programme. The regulated utility has also completed the securitisation of its business, which ratings agency Standard & Poor’s (S&P) says was carried out “to refinance [the utility’s] acquisition by a consortium of infrastructure funds”. 

The securitisation process included the upgrading of £200 million of existing bonds to class A debt, which is more secure. S&P says Affinity Water’s risk profile is “excellent”, but pointed out the firm is highly leveraged, “which results in relatively weak cash flow debt coverage metrics”.

For USS, the deal marks its second private placement in the UK water sector. Last October, the pension fund lent £100 million of 25-year inflation-linked debt to South East Water – its first ever infrastructure debt investment. South East Water is owned by Canadian pension Caisse de depots et placement du Quebec, the Utilities Trust of Australia fund (managed by Hastings Funds Management), and the Desjardins Employees Pension Fund.

Commenting on the Affinity Water deal, Gavin Merchant, senior investment manager for infrastructure at USS, commented:

“Our investment philosophy is based on building strong relationships with a select number of core infrastructure companies. In doing so, we hope to be able to work with the management team of these companies to offer a unique and flexible source of long-term financing. We see these relationships as long-term partnerships, where we can potentially provide capital for future financing requirements of the business.”

Merchant told Private Debt Investor's sister publication Infrastructure Investor last October that the pension has flexibility to invest in infrastructure across the capital structure, provided deals are located in the UK and are index-linked. Merchant joined USS last September from UK public-private partnership investor Equitix, to boost the pension’s direct investments portfolio.