Thames Water faces sink or swim moment as debt crisis deepens
ONTARIO PENSION FUND OMERS IS INVESTOR
Michael Bow
Sun, 28 January 2024
Thames Water serves 15 million households - Jose Sarmento Matos/Bloomberg
A key portion of Thames Water’s £14bn debt pile has crashed to a record new low in the clearest sign yet that investors are abandoning the embattled group.
Fund managers who own Thames debt have been dumping some of its riskiest IOUs in recent days over fears the company could fail to repay the debts.
A bond linked to an entity in Thames’ byzantine debt structure has crashed by 20pc in value over the last fortnight. The bond, which is linked to a company called Thames Water (Kemble) Finance, is now worth 40p in the pound, down from a price of 50p. They were worth as much as 87p six months ago.
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While having no immediate impact on the group, or consumers, the bond market tremors are a sign investors believe that Thames Water could be heading for a further financial squeeze.
“The market is telling you that there is a high probability that these bonds don’t get repaid,” says one investor.
Thames is Britain’s largest water company with 15m customers. But the utility giant has been hamstrung in recent years by its complex debt structure.
It has £14bn of debts against £19bn of equity, according to most recent figures, meaning it has borrowed almost as much as investors have put in. This high leverage makes the company vulnerable to the whims of investors and banks.
Rising interest rates have put intense pressure on Thames as its debt repayment costs have increased rapidly.
Thames Water was handed a £750m lifeline from shareholders in July to stave off nationalisation, but bosses have admitted the company may need £2.5bn between now and 2030 to remain viable. Will it be able to raise the money?
As well as financial concerns, campaigners such as former Undertones frontman Feargal Sharkey have also taken aim at the company over its environmental record.
Figures released last week showed the amount of sewage Thames dumped in London’s rivers rose by nearly five times last year versus 2022.
The gloomy backdrop underscores the challenges facing chairman Sir Adrian Montague and new Thames chief executive Chris Weston.
As the architect of New Labour’s Private Finance Initiatives (PFI) projects in the late 1990s, Sir Adrian helped usher in an era when deep-pocketed private investors ploughed money into public services.
Known as a fixer in Whitehall, Sir Adrian was parachuted into Thames in June to draw on his deep experience balancing the twin demands of the City and Westminster.
His experience will be valuable as Thames faces pressure from regulators, politicians, debtors, shareholders and campaigners alike.
Weston was the former chief executive of Aggreko and is well regarded in City circles for leading the power group successfully for seven years.
In a sign of intent last week, the duo moved to reshuffle a small portion of Thames’ debt mountain.
Chris Weston is charged with clearing some of Thames Water's debt pile - Andrey Rudakov/Bloomberg
The company raised £850m of debt from investors at the same time as buying back £500m of existing debt. Orders for the bond were oversubscribed.
A bond investor said the sudden refinancing showed Thames was trying to get on the “front foot” to build momentum in the market ahead of a difficult year.
“It does show a degree of confidence at the regulated level. If it had not been subscribed to, it would have been a real kick in the teeth,” they said.
Tellingly, the bonds were priced at a more attractive price than they could have been, offering a small discount to the value of other Thames bonds.
TwentyFour Asset Management partner Gordon Shannon said the discount was an attempt to lift some of the gloom over the Thames name.
“Clearly Thames are giving a level of concession because there’s more than a little bit of a stink around the name,” he says.
However, the debt reshuffle is relatively small beer.
Shannon says: “While issuing longer dated debt is helpful at the margin in pushing some of their issues down the road, what Thames really needs is a fresh equity injection.”
Thames has a complex structure, with a regulated operating company called Thames Water Utilities running the network and several companies dubbed Kemble – named after the source of the River Thames – raising money to invest in the network by borrowing from bond markets.
Money flows back from Thames to Kemble but there are concerns about how much will trickle up in future. Ofwat launched a recent investigation into a £37.5m dividend payment that may have flouted regulations.
The bond slide last week signals that markets fear payments to bondholders could be choked off.
With shareholders like USS and OMERS having already ploughed £750m into the group over the summer, the question remains whether they will ride to the rescue once again or throw in the towel. Both groups have written down the value of their stakes in the utility recently. This week’s bond slide may prompt a further reassessment of Thames’ value.
One solution to the crunch may be to sell off some assets, such as the naming and branding rights for “Thames Water”, or to sell off swathes of UK land owned.
Thames licences its logo to companies such as HomeServe, so there also could be scope to make money from a sale. Sir Adrian and Weston will be weighing up how to fix the stink around Thames.
“It’s basically a game of chicken between the Government and the shareholders now on allowed returns versus the need for investment,” says the bondholder.
Thames needs to fix its leaks quickly.
Michael Bow
Sun, 28 January 2024
Thames Water serves 15 million households - Jose Sarmento Matos/Bloomberg
A key portion of Thames Water’s £14bn debt pile has crashed to a record new low in the clearest sign yet that investors are abandoning the embattled group.
Fund managers who own Thames debt have been dumping some of its riskiest IOUs in recent days over fears the company could fail to repay the debts.
A bond linked to an entity in Thames’ byzantine debt structure has crashed by 20pc in value over the last fortnight. The bond, which is linked to a company called Thames Water (Kemble) Finance, is now worth 40p in the pound, down from a price of 50p. They were worth as much as 87p six months ago.
\
While having no immediate impact on the group, or consumers, the bond market tremors are a sign investors believe that Thames Water could be heading for a further financial squeeze.
“The market is telling you that there is a high probability that these bonds don’t get repaid,” says one investor.
Thames is Britain’s largest water company with 15m customers. But the utility giant has been hamstrung in recent years by its complex debt structure.
It has £14bn of debts against £19bn of equity, according to most recent figures, meaning it has borrowed almost as much as investors have put in. This high leverage makes the company vulnerable to the whims of investors and banks.
Rising interest rates have put intense pressure on Thames as its debt repayment costs have increased rapidly.
Thames Water was handed a £750m lifeline from shareholders in July to stave off nationalisation, but bosses have admitted the company may need £2.5bn between now and 2030 to remain viable. Will it be able to raise the money?
As well as financial concerns, campaigners such as former Undertones frontman Feargal Sharkey have also taken aim at the company over its environmental record.
Figures released last week showed the amount of sewage Thames dumped in London’s rivers rose by nearly five times last year versus 2022.
The gloomy backdrop underscores the challenges facing chairman Sir Adrian Montague and new Thames chief executive Chris Weston.
As the architect of New Labour’s Private Finance Initiatives (PFI) projects in the late 1990s, Sir Adrian helped usher in an era when deep-pocketed private investors ploughed money into public services.
Known as a fixer in Whitehall, Sir Adrian was parachuted into Thames in June to draw on his deep experience balancing the twin demands of the City and Westminster.
His experience will be valuable as Thames faces pressure from regulators, politicians, debtors, shareholders and campaigners alike.
Weston was the former chief executive of Aggreko and is well regarded in City circles for leading the power group successfully for seven years.
In a sign of intent last week, the duo moved to reshuffle a small portion of Thames’ debt mountain.
Chris Weston is charged with clearing some of Thames Water's debt pile - Andrey Rudakov/Bloomberg
The company raised £850m of debt from investors at the same time as buying back £500m of existing debt. Orders for the bond were oversubscribed.
A bond investor said the sudden refinancing showed Thames was trying to get on the “front foot” to build momentum in the market ahead of a difficult year.
“It does show a degree of confidence at the regulated level. If it had not been subscribed to, it would have been a real kick in the teeth,” they said.
Tellingly, the bonds were priced at a more attractive price than they could have been, offering a small discount to the value of other Thames bonds.
TwentyFour Asset Management partner Gordon Shannon said the discount was an attempt to lift some of the gloom over the Thames name.
“Clearly Thames are giving a level of concession because there’s more than a little bit of a stink around the name,” he says.
However, the debt reshuffle is relatively small beer.
Shannon says: “While issuing longer dated debt is helpful at the margin in pushing some of their issues down the road, what Thames really needs is a fresh equity injection.”
Thames has a complex structure, with a regulated operating company called Thames Water Utilities running the network and several companies dubbed Kemble – named after the source of the River Thames – raising money to invest in the network by borrowing from bond markets.
Money flows back from Thames to Kemble but there are concerns about how much will trickle up in future. Ofwat launched a recent investigation into a £37.5m dividend payment that may have flouted regulations.
The bond slide last week signals that markets fear payments to bondholders could be choked off.
With shareholders like USS and OMERS having already ploughed £750m into the group over the summer, the question remains whether they will ride to the rescue once again or throw in the towel. Both groups have written down the value of their stakes in the utility recently. This week’s bond slide may prompt a further reassessment of Thames’ value.
One solution to the crunch may be to sell off some assets, such as the naming and branding rights for “Thames Water”, or to sell off swathes of UK land owned.
Thames licences its logo to companies such as HomeServe, so there also could be scope to make money from a sale. Sir Adrian and Weston will be weighing up how to fix the stink around Thames.
“It’s basically a game of chicken between the Government and the shareholders now on allowed returns versus the need for investment,” says the bondholder.
Thames needs to fix its leaks quickly.
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