ICSM Business Membership Group: fighting late and non-payment – time running out for Thames Water as utility ponders its £15bn debt with two potential deals

By Harry Mottram: The once debt free utility is labouring under an impossible burden of a £15bn debt mountain that some investors believe is impossible to repay meaning the company could go bust. If that happens the Government could step in to ensure the taps still flow with water under a special type of nationalisation in order to sort out the mess.

The latest twist comes at board level where there are two competing rescue plans. They are classed in terms of creditors as group A bondholders and group B bondholders. Writing in The Guardian Anna Issac explained: “Group A represents £12bn of Thames’ debt, v a much smaller junior debt pile held by group B. Group A includes controversial US hedge funds Elliott Partners and Silver Point, as well as some well-known UK fund managers such as M&G group, and wants to charge Thames annual interest of 9.75% – plus relatively high fees, particularly if the debt is repaid early. Group B lenders would charge interest at a lower rate of 8% with significantly lower fees and different conditions. Both camps insist on having “super senior” status – ranking above the A bonds in the event of a default.”

The utility’s chairman, Sir Adrian Montague, is keen on group A’s offer but according to sources within the board of directors group B is seen as better value. A backer of group B told The Guardian: “We have a very clear duty to consider not just survival but sustainability of finances. I’m not convinced the right emphasis has been put on that by some on the board. That includes the chairman. The group A offer was sought as an emergency measure. But, like most emergency measures, it comes with major downsides. If there’s an offer which can leverage more investment in the long term, that’s serious.”

The bigger they are the harder they fall. That’s certainly the case of Thames Water, the once mighty utility privatised in 1989 by the Conservative Government with no debt and now on the brink of collapse with its credit rating reduced to junk. Owing some £15bn in debt it has little or no chance of borrowing its way out of trouble with the most likely outcome being some form of nationalisation. The Government however does not want to inherit that debt with the Chancellor Rachel Reeves trying to cut spending rather than increasing.

Ian Carrotte of ICSM said: “There’s a widely held view in business that when a company gets into trouble it is up to the owners to take responsibility and to sort out the problems rather than crying out for help from the Government. No firm is too big to fail and that includes utilities. If Thames Water goes bust which it effectively is already then the banks and other funders need to take the hit not the tax payers. Suppliers, contractors and workers should be protected while the directors who have brought this sad affair about should be fired.”

 Thames Water is currently in special measures imposed by Ofwat. If it fails to raise new money then the water watchdog and the Government would be likely have to put the utility into a form of renationalisation.

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ICSM, The Exchange, Express Park, Bristol Road, Bridgwater, Somerset TA6 4RR. Tel: 0844 854 1850. www.icsmcredit.com. Ian.carrotte@icsmcredit.com