Mon 09/20/2021 14:08 PM
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A number of smaller U.K. energy suppliers are facing going concern risks as gas prices rise to a record high ahead of the winter demand. The U.K. government has today been in talks with energy suppliers and the nation’s regulator Ofgem as mid market energy suppliers, unable to meet rising costs, face the prospect of bankruptcy. Continue reading for our EMEA Middle Market team's analysis of the ongoing energy crisis, and request a trial for access to reporting and intelligence on hundreds of stressed, distressed and performing credits. 

Sources told Reorg that advisors are working with several mid-sized energy suppliers, running a combination of accelerated sales, seeking new investment from existing shareholders or third-party bailouts, and raising emergency and government funding.

Bulb emerged as the latest U.K. energy provider to seek new money or a potential joint venture or merger as it grapples with soaring wholesale market prices, an increase in non-payment rates and bad debt from its consumers and a lack of working capital to manage the seasonality of the business’ cash flow. The company, which is working with Lazard to explore options, supplies renewable electricity and gas to about 1.7 million domestic customers, and faces about £75 million in upcoming maturities on Dec. 31, 2021.

The government is considering offering state-backed loans to larger energy companies that are willing to take on customers of failed providers. Companies such as British Gas are poised to take advantage of the market dislocation and snap up smaller providers which are unable to withstand the gas price spike, sources said. In March, British Gas acquired Nabuh Energy after Ofgem named it as a supplier of concern and issued it with a final order threatening its energy licence after its debt of £2.68 million wasn't settled on time.

In the U.K. five energy suppliers have collapsed since August, including People’s Energy, Utility Point, PfP Energy, MoneyPlus Energy and Hub Energy. Advisors and investors expect to see more insolvencies while others anticipate opportunities for consolidation in the near term, sources said.

Small energy suppliers that provide fixed-rate pricing plans to customers have been hardest hit because soaring wholesale costs have led to unsustainable capital structures and business models. Distressed investors remain wary of the sector as the need for more emergency bailouts for struggling energy providers emerge and government discussions around the levels of support remain in the early stages.

Other companies affected by the hike in gas prices include food producers such as Boparan. Two U.K.-based fertilizer plants have been shut as a result of rising gas prices, which has caused a shortage of carbon dioxide threatening food production. The factories, which are owned by U.S. group CF Industries, account for about 60% of the U.K.’s commercial supply of carbon dioxide as a byproduct of fertilizer manufacture. In addition, low wind power output and outages at nuclear plants in the U.K. has also increased demand for gas, further pushing up prices.

Sources said they expect the government to provide some emergency relief which will largely be aimed at ensuring the typical U.K. consumer does not bear the brunt of the tax hikes. Today the U.K.’s business secretary Kwasi Kwarteng said in the House of Commons that “the government will not be bailing out failed companies. There will be no rewards for failure or mismanagement. The taxpayer should not be expected to prop up companies which have poor business models and are not resilient to fluctuations in price.”

Asked by Alba MP Neale Hanvey if the government will create a state-owned energy company, Kwarteng said “we are looking at all options” but stressed he prefers “market-based solutions” and that the government and Ofgem are working with the industry.

Kwarteng noted that the government is due to release a joint statement with Ofgem which will provide further information on the next steps later today.

--Andrew Ross, Lara Gibson
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