Thames Water enters its end game

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Shouting matches between utility companies and regulators are common in the UK. There is always brinkmanship before regulators rubber-stamp multiyear business plans as investors try to juice their returns.

Thames Water’s nine shareholders and regulator Ofwat, however, have moved firmly beyond bluff tactics. Its future now rests on finding new equity investors. That will not be quick or easy.

Nine shareholders, which own Thames Water through a fiendishly complex corporate structure, are ready to write off about £5bn. They announced on Thursday they were not willing to inject new equity into the company. Some of this estimated loss has already been booked in the accounts of funds such as Omers.

In a statement of intent, the shareholders have hired restructuring advisers at Alvarez & Marsal to engage with the creditors of Thames Water’s ultimate parent, Kemble Water Holdings. It needs to repay a £190mn bank loan by the end of April. Possible outcomes could include a debt-for-equity swap or insolvency.

It is an embarrassing policy failure that the UK’s biggest water utility is drowning beneath its financially engineered, debt-laden structure. Thames Water may yet require special administration, a form of temporary nationalisation. But other options are not yet exhausted. Thames Water had £2.4bn of liquidity at the end of February; it can meet its commitments until at least May 2025.

Regardless, the utility needs more equity. Thames Water’s existing shareholders had promised £750mn before April next year, £500mn of which was due this month. Thames Water also requires a further £2.5bn before 2030 to fund its investment plan and maintain assets.

Ofwat has told the board to “pursue all options to seek further equity”. But this stalemate will persist. Any new investors will want to see Ofwat’s draft finding in mid-June that will set out returns investors can expect to make between 2025 and 2030. That document will also indicate increases in customers’ bills to fund investment in Thames Water’s creaking infrastructure.

It is not obvious why new investors would pile in before a potential restructuring at Kemble is resolved. Frankly, a special administration might offer a cleaner proposition to invest new funds, with a slice of the group’s £18.3bn debt pile removed.

Thames Water says discussions with Ofwat indicate its current business plan would be uninvestable. Perhaps, although regulators do tend to make small but important concessions on cost of capital. Thames Water could also adjust its own business plan, although its requests for leniency on penalties for sewage spills would still test regulators and the public mood.

This is the beginning of the end for Thames Water in its current form. The process will still be tortuous and lengthy.

nathalie.thomas@ft.com