Thames Water’s Future in Limbo as Bondholders Battle Over £3 billion Rescue Deal

Summary:

Thames Water, the UK’s largest water utility, is caught in a standoff between its creditors as lower-ranking bondholders, represented by hedge fund Polus Capital Management, have offered a £3bn financing package at an 8% interest rate. This deal promises the full sum upfront and claims more flexible terms than a competing offer from the company’s senior class A bondholders, who have already agreed in principle to provide a £3bn loan with a higher 9.75% interest rate. The class B proposal, though offering lower interest and flexibility, will need approval from class A bondholders, who may be resistant as this loan would take priority over existing class A debt if Thames Water defaults.

The stakes are high, with Thames Water facing a severe cash crunch due to its £19bn debt burden and the looming risk of renationalisation. In addition to the emergency debt financing, the utility seeks to raise over £3bn in equity. Rothschild is managing the equity raise, with potential bids due by the end of the month. Among potential equity investors is Castle Water, which may explore a debt-for-equity swap arrangement.

Further complicating the picture is a looming regulatory decision on customer bills. Thames Water has sought a 53% increase in real terms, as the regulator, Ofwat, is expected to make a final ruling in the coming months. This price settlement will be crucial for Thames Water’s future financial stability and attractiveness to potential investors.

My opinion:

This financing struggle underscores the broader concerns around the privatised UK water industry’s ability to manage long-term investments and financial stability. For Thames Water, the class B bondholders’ offer, with its lower interest rate and upfront funding, seems attractive in principle as it could save the company substantial costs, making more funds available for critical infrastructure improvements rather than paying excessive interest.

However, this alternative funding arrangement may stall due to class A bondholders’ resistance, a predictable hurdle when senior creditors are faced with potential subordination. From a regulatory perspective, Ofwat’s handling of Thames Water’s financial issues will be pivotal. The company’s substantial debt load and call for a steep increase in bills highlight a dilemma that the regulator faces—balancing affordability for customers with the financial health of the utility.

In my view, the class B offer, if supported, could bring a more sustainable financial path for Thames Water, especially in light of the pressures on households facing rising costs of living. The utility sector’s stability is crucial, not only to ensure consistent water services but to avoid the heavy costs associated with renationalisation, which could burden the public sector. For Thames Water, success may depend on navigating creditor approvals and securing Ofwat’s support for a manageable pricing structure that also sustains necessary investments in infrastructure.