Thames Water creditors make ‘take it or leave it’ rescue offer
Creditors of Thames Water planning a rescue takeover of the stricken utility have submitted an improved plan to regulators offering a £4 billion, 25 per cent write-off of their debt in return for renegotiated targets on pollution incidents and mains water leakage.
With the crisis at Britain’s largest privatised water utility in its 18th month since its previous shareholders walked away declaring Thames uninvestable, the creditors have submitted what appears to be a take-it-or-leave-it final plan to recapitalise the company.
They pledge £20.5 billion of investment in catch-up infrastructure in the five years to spring 2030, with a further £24.9 billion of capital expenditure in the subsequent five-year regulatory period.
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In addition, they have put forward plans to “re-sequence” proposed spending. For this, the creditors are asking the regulators — Ofwat, the Environment Agency and the Drinking Water Inspectorate — to accept new performance targets to stop the company being saddled with a future penalties regime for missed targets.
The Thames Water crisis has a notional deadline of October 22 for the regulators to accept the senior creditors’ proposals.
That is the current date when, if the company has not secured a negotiated deal with the regulators, it will have to take its case to the Competition and Markets Authority (CMA) and seek a better outcome than the “final determination” handed down by Ofwat this year. The company has stated that this ruling set targets that are not achievable.
In reality, it seems unlikely that this deadline or a CMA referral will come into play.
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If the regulators accept the re-submitted proposals, they will have to go to both the environment department and the Treasury for a sign-off — a process that would be expected to take longer than three weeks.
If the regulators push back on the creditors’ proposals then the indications are that — with a CMA referral likely to lead to a months-long investigation — the creditors will take the view that their “market solution” has little timely chance of being executed.
Rejection of the creditors’ plan would inevitably lead to the government being forced to call in administrators and the company being put into a “special administration regime”, a first in the privatised water industry and akin to the failure of Railtrack at the start of the century. It ended up being renationalised as Network Rail.
The proposals by the senior creditors foresee their own class A debt being written off to the tune of nearly £4 billion, taking that class of debt down to £11.8 billion from £15.8 billion.
Junior or class B creditors speaking for nearly £1 billion in loans would be wiped out entirely under the plan. Sources say that £2.7 billion of other lending arrangements and access to new debt would take Thames Water’s gross debt down from more than £20 billion to £14.5 billion.
After expected cash balances from the monthly income from its 16 million household customers, which at the date of a transaction are expected to stand at £2.3 billion, Thames Water would have a net debt level of £12.2 billion.
This is a key number as it would mean that the company’s gearing, or the ratio of its debt to its regulatory capital or asset value of £23.2 billion, would stand at about 52 per cent.
That would be the lowest in the industry, within the financial parameters of what Ofwat would class a financially resilient company, and, more crucially, allow the company to get an investment-grade rating and be able to use debt markets more cheaply.
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The creditors propose a new chairman, the infrastructure veteran Mike McTighe, to replace Sir Adrian Montague. Sources say the members of a new board have been identified. It appears likely that this board will review the future of the current executive team.
“This is a clear and detailed plan and improved submission to Ofwat,” a source close to the proposals said. “It is a plan that will get Thames Water out of a regulatory settlement in which it is doomed to fail.”