HSBC and Barclays Bank short Thames Water.

(Bloomberg) - Credit traders at Barclays Plc and HSBC Holdings Plc are making markets for clients betting on Thames Water's debt as the crisis at the U.K.'s biggest water company, Thames Water, escalates.

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Traders at the London credit desks of the two U.K. banks began helping to place bets on the debt, according to people familiar with the matter. Some of the people said Goldman Sachs Group Inc.

Short interest in some of Thames Water's bonds has surged since last week, when shareholders refused to inject more money into Kemble Water Holdings Ltd. after a standoff between parent company Kemble Water Holdings Ltd. and water regulator Ofwat led to a default by Kemble Water. Investors are now betting that some form of restructuring of Thames Water's £16 billion ($20 billion) debt is likely if no solution is found to break the deadlock.

According to data compiled by S&P Global Market Intelligence, in a bond maturing in 2028, the current short accounts for nearly 18.5% of the percentage value at issuance, compared to just 1.26% at the beginning of the year.

Creating a market for short selling is a standard practice and an important source of revenue for the big banks, but it does not necessarily reflect their view of Thames Water's situation. In this case, the banks' dealings with Thames Water, which supplies water to a quarter of England, including London, could link them to the company's deepening debt crisis.

Representatives of HSBC, Barclays Bank and Goldman Sachs declined to comment.

Thames Water's crisis came to a head last month when Ofwat announced that it would not support Thames Water's next five-year plan. The plan envisaged a 40% increase in water charges to pay for infrastructure improvements and mounting debt. Prime Minister Rishi Sunak's government has been pushing Thames Water to resolve its financial woes on its own, and ministers have resisted pressure to put the company on SGM.

A group of Thames Water bondholders have engaged consultants ahead of potential restructuring negotiations.

Recent bond issues by other water companies such as Southern Water and Northumbrian Water have also been affected by the Thames Water crisis. The spread between Southern Water's April 2040 bond and the benchmark widened to 288 basis points. The bond was priced 255 basis points above the benchmark gilt in March.

-Written with the help of Neil Callanan.

(Other water utility bonds were added in the last paragraph).

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