Thames Water and its lenders enlist lawyers amid nationalisation threat


Luke Barr
Sat, 20 April 2024 

thames water

Thames Water and a group of lenders to its parent company have drafted in lawyers amid a brewing fallout over the troubled supplier’s future.

Both Freshfields Bruckhaus Deringer and Linklaters have been instructed by Kemble lenders and Thames Water respectively, as a potential restructuring battle looms.

The magic circle duo are among a raft of City advisers working on the potential fallout from Thames Water, which is battling to stave off a special administration regime that could spark huge losses for creditors.

Sir Adrian Montague, chairman of Thames Water, began his career at Linklaters and was formerly a partner at the law firm.

Thames Water chairman Sir Adrian Montague was previously a partner at Linklaters - Leon Neal/Getty Images

Lenders to both Thames and Kemble are facing a wave of uncertainty over the supplier’s future, as it emerged last week that some creditors could suffer losses up to 40pc if the company is nationalised.


Concerns over Thames Water’s finances have prompted various groups to enlist advisers ahead of a prospective legal battle, with EY separately advising Kemble lenders on financing negotiations.

The Telegraph reported last month that a syndicate of banks behind a £190m loan to Kemble includes the Bank of China and the Infrastructure and Commercial Bank of China.

Kemble is meant to repay that £190m to its lenders by the end of April but the deadline is set to be missed after shareholders cut off funding. It will then be up to the banks to either grant an extension or tip the company into administration.

Strategic discussions are also being held among other lenders in the Thames structure, which consists of an £18bn debt pile.

One senior bondholder said he had been approached by other Thames creditors about forming a group to bolster their defences.

A debt analyst close to the situation said that by teaming up, creditors would be able to appoint their own legal advisers.

He said: “The one group of people that are going to get paid here are the lawyers. You probably do want to band together to get some legal steer on the art of the possible.”

The uncertainty over Thames Water’s future was heightened last week as details of the Government’s nationalisation plan emerged.

Proposals being overseen by the Department for Environment, Food and Rural Affairs signalled that the bulk of Thames Water’s debts will be added to the public purse as part of a taxpayer-backed bailout.

If nationalised, the Government would manage Thames Water indirectly through an arms-length body.

Ministers would subsequently seek to return it to private ownership over time, with the prospect of the supplier being split into two separate companies.

Details of a possible break-up, as first revealed by The Telegraph earlier this month, indicate that one entity could oversee London while the other will serve Thames Valley and the Home Counties.

Bosses at Thames Water are currently racing to secure its future in the private sector but were dealt a blow in March after shareholders cut off funding from the business.

Thames Water shareholders said they will “work constructively” with Thames Water, Ofwat and the Government.

Freshfields, Linklaters and Thames Water declined to comment.

Preparations made for Government takeover of Thames Water, reports say


David Lynch,

 PA Political Staff
Fri, 19 April 2024 


Thames Water could be taken over by the Government, with its £15 billion debt added to the public purse, reports have suggested.

A blueprint codenamed Project Timber is being drawn up in Whitehall, according to the Guardian newspaper, which could see the UK’s largest water company effectively nationalised.

Under the plans, the company – which serves 16 million customers in London and the Thames Valley region – would be placed in a form of special administration in the scenario that its parent company fails.

Once under the stewardship of ministers, it could be broken up into two separate companies serving London and the Thames Valley, the newspaper said, though the Government and water regulator Ofwat remain optimistic this will not happen.

Some of Thames’ lenders could lose more than a third of their investment under the plans, according to the reports.

There is deep concern within Westminster about Thames Water’s finances, with multiple MPs having raised concerns about its struggle for cash to stay afloat in the Commons.

The Government would not be drawn into directly commenting on the contingency planning, with the Department for Environment, Food and Rural Affairs (Defra) only saying it prepares for a “range of scenarios”.

There is deep concern within Westminster about Thames Water’s finances (Andrew Matthews/PA)

“As a responsible Government, we prepare for a range of scenarios across our regulated industries – including water – as the public would expect,” a Defra spokesperson said.

Thames Water has reportedly drawn up an updated business plan, which could be published within days amid its financial woes.

It had originally wanted to raise customer bills by 40% to fund an investment programme worth £18.7 billion under plans published in October, but the company said water regulator Ofwat had imposed regulations on the plan which made it “uninvestable”.

Thames Water originally wanted to raise customer bills by as much as 40% to fund an investment programme, but this was stopped by Ofwat (Dominic Lipinski/PA)

The company has £2.4 billion cash available as of February, enough cash for it to remain solvent until next year, possibly delaying any decision about its future for the next government.

Liberal Democrat Treasury spokesperson and Richmond Park MP, Sarah Olney said: “Millions of households and taxpayers deserve to know Thames Water’s fate. This corporate clown show must end now.

“The secret plans must be published immediately. Thames Water should have been put into special administration long ago, but the Government is too weak to take on this disgraced polluter.”

Neither Ofwat nor Thames Water wished to comment on the reports.

P3 PUBLIC PENSIONS FUND PRIVATIZATION

Two Canadian pension plans risk reputation hit from investments in troubled Thames Water

U.K. utility fiasco plunges OMERS and BCI into the midst of potential rescue plan

Author of the article:Barbara Shecter
Published Jul 06, 2023 • Last updated 1 hour ago • 3 minute read

The U.K. government has expressed serious concern about the financial plight of the country's biggest privatized water company. 

PHOTO BY BEN STANSALL/AFP VIA GETTY IMAGES

A troubled water utility company in the United Kingdom that counts two of Canada’s biggest public pensions as large shareholders is facing regulatory scrutiny and fines for sewage leaks and could require a financial bailout

The Ontario Municipal Employees Retirement System (OMERS) and British Columbia Investment Management Corporation (BCI) own 31.8 per cent and and 8.7 per cent of Thames Water, respectively. Analysts at DBRS Morningstar said in a July 5 report that OMERS and BCI are expected to weather the storm with minimal financial damage given their size, diversification and long-term performance — even if Thames Water were to collapse — but there is reputational risk for the Canadian pensions, which could affect future investment opportunities.

Thames Water is the largest water utility in the U.K., serving about a quarter of the population. It is heavily indebted and has faced financial difficulties in the face of rising interest rates. Investors have been called on to pony up £1 billion, after injecting £500 million in March, to upgrade infrastructure and help manage the £14-billion debt load. However, the U.K. government is now understood to be considering a range of options to stave off the collapse of Thames Water, including the possibility of placing it into a special administration regime that could take the company into temporary public ownership and result in financial losses to the current shareholders, according to the DBRS report.

One of Thames Water’s large shareholders, the £90-billion Universities Superannuation Scheme, which has a 20 per cent stake in the utility, has publicly pledged support for Thames Water. It will face questions about its stake in Thames Water from the U.K.’s pension regulator, as early as this week, according to a July 5 report from the Financial Times, citing people familiar with the situation.

Both Canadian pensions declined to comment on their role in what is happening with Thames Water, referring instead to a June 28 statement from Thames Water Utilities Finance PLC, which said the utility “is continuing to work constructively with its shareholders in relation to the further equity funding expected to be required to support Thames Water’s turnaround and investment plans.”

That statement added that the utility’s regulator, Ofwat, is being kept “fully informed on progress of the company’s turnaround and engagement with shareholders” and that Thames Water maintained a strong liquidity position including £4.4 billion of cash and committed funding as at 31 March 2023.

OMERS has been an investor in Thames Water since 2017, following a divestiture by Australia’s Macquarie Group, which later faced criticism for ratcheting up the debt while taking profits from the utility. BCI has been an investor in Thames Water since 2006.

Keith Ambachtsheer, a Canadian pension expert and director emeritus of International Centre for Pension Management, said the Thames Water case pokes a hole in the frequent characterization of infrastructure investing as a suitable investment for long-term pension plans and an easy way to generate inflation-linked returns.

“Thames Water offers a counter to that view: infrastructure investing can also be challenging and risky,” Ambachtsheer said in an email to the Financial Post on July 5.

The growing scandal at the utility has raised questions in the U.K. about the strategy of privatizing critical utilities.

In one of the latest knocks for Thames Water, the embattled utility was fined £3.3 million on July 4 at Lewes Crown Court after a faulty storm pump that went unnoticed spilled sewage into rivers near Gatwick Airport.

On June 27, Sarah Bentley, the CEO of Thames Water, stepped down abruptly. Her exit came amid reports that the utility’s leakage rate was at a five-year high, according to a report in the Guardian. Before she stepped down, Bentley forfeited her bonuses but it appeared to be too little to dispel growing controversy.

The problems at Thames Water have also spilled into ESG funds, as the utility has issued around US$3 billion of green bonds since 2022.

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According to a Bloomberg News report on July 4, more than 200 ESG funds bought into those bond issues and are left assessing what impact any environmental, social and governance shortcomings at the utility will have on their holdings.

“Investing in water sounds ‘green’. Investing in a water utility with a long list of environmental problems and apparently no credible plan to resolve them is not,” said Ambachtsheer. “Where was the ‘due diligence’?”

The pensions invested in Thames Water may also face questions over the utility’s environmental impact.

Thames Water’s Debt Woes Raise Specter of UK’s Energy Crisis

Todd Gillespie, Priscila Azevedo Rocha and Irene García Pérez, Bloomberg News

Engineers from a Thames Water leak hunting team put equipment in place during the crew's night shift in London, UK, on Wednesday, May 2, 2023. Thames Water has more than 800 workers either pinpointing the locations of suspected leaks or fixing the ones that get discovered, as the UK now pressures its water industry to reduce waste as lack of supply threatens water security. , Bloomberg

(Bloomberg) -- The UK is facing a potential water sector crisis as it considers a temporary takeover of Thames Water Ltd, a rare move that was used for the first time during the recent energy crunch to protect customers of a failing supplier.

Possible intervention to rescue Thames Water’s recalls unprecedented action taken to prop up Bulb Energy Ltd., the government’s first special administration in November 2021. But England’s privatized water companies have historically relied on the public debt markets to fund their operations, making the plan for Thames Water potentially reverberate further.

The cost of nationalizing Thames Water would be passed to the taxpayer at a time when inflation is running high and living standards are dropping. Investments needed to improve water infrastructure are likely to push up bills further, according to Investec Bank Plc. Added costs for consumers will be difficult for the ruling Conservative party to defend coming into an election next year.  

Like energy, water is a sector that’s considered too important to fail. A layered corporate structure, with billions of pounds of debt spread among different holders, makes Thames Water complicated for the government to take over. However, unlike energy suppliers, water companies own the pipeline infrastructure and they supply customers, making a state takeover more significant.

Thames Water has issued bonds through different layers of the company, each offering different security to investors. Depending on how an administration proceeds, that could trigger a variety of outcomes for different investors. In a debt offering in 2021 the company already warned that government intervention in the industry could impact the company’s ability to meet its obligations.

“A special administration regime would facilitate a transfer to new owners, but leave ring-fenced bondholders unable to enforce any security and with no guarantee of being made whole in a new financial structure,” Paul Vickars, senior credit analyst at Bloomberg Intelligence said. 

The water company had £13.9 billion of debt as of September, according to the latest company filings. That includes £2.8 billion of bonds linked to UK inflation. Some, but not all, are backed by the regulated assets owned by the company. Any hit to the company’s credit rating might also impact the value of its bonds.

Thames Water may need to raise more capital from investors soon, but its debt-to-equity ratio is the highest among its peers. That makes it more challenging for the company to raise the capital needed to make the required improvements on its infrastructure. Meanwhile, tapping the debt markets to refinance upcoming maturities would also prove challenging.

Thames Water said it is working with shareholders to raise more equity, in a statement published in response to media coverage about its position. Regulator Ofwat said it is in discussions with Thames Water on the need for a “robust and credible plan”.

©2023 Bloomberg L.P.

UK water firms drowning in £65bn of debt with cost of repayments set to soar due to inflation (but they're still paying shareholders huge dividends)

By LUKE BARR FOR THE DAILY MAIL
28 June 2023

Britain's beleaguered water sector is creaking under the weight of a £65billion debt mountain that could rise even further due to inflation.

The staggering combined debt pile built up by the UK’s 12 water companies means that huge swathes of cash are being spent on interest payments – money that could be spent cleaning up polluted rivers or fixing leaky pipes.

And they face falling deeper into the red as a big chunk of the debt is linked to inflation, which has been rising sharply.

Concern over the financial health of water companies – many of which are foreign-owned – has jumped amid fears that Thames Water, which has 15m customers, is close to collapse.

This has followed the sudden departure of its chief executive Sarah Bentley, who resigned on Tuesday after just three years in the role.

Exploited: The staggering debt pile built up by the UK’s 12 water companies means cash is being spent on interest payments and not cleaning up polluted rivers or fixing leaky pipes

The company, which is in talks to secure extra funding, gave no explanation for Bentley’s exit.

Last year she was paid more than £2million despite facing criticism for dumping sewage into waterways and implementing a hosepipe ban.

The Government is on stand-by to deal with any fallout from the company’s potential failure, which includes possibly nationalising the business on a temporary basis.

Emergency talks have been taking place between Defra – the environment ministry – and industry regulator Ofwat to consider options for Britain’s biggest water supplier if it cannot raise enough cash.

There have been growing fears around Thames Water’s financial health over the past 12 months after its debts rose to roughly £14billion, which is far greater than any other supplier.

Last year it raked in £2.2billion in revenues but posted losses of nearly £1billion.

Business and trade minister Kemi Badenoch said yesterday that she was ‘extremely concerned’ and that the Government had to ‘make sure that Thames Water as an entity survives’.

Thames Water sought to calm investors yesterday by saying it had a ‘strong liquidity position’, with £4.4billion of cash.

It also highlighted a £500million cash injection in March from its shareholders, who include the state-backed China Investment Corporation and the Abu Dhabi Investment Authority.

 


But market experts warn this is unlikely to make a dent in its mountainous debt pile. Thames Water is not alone is racking up huge debts in an industry which was privatised by Margaret Thatcher back in 1989.

United Utilities and Severn Trent, which are both listed on the London Stock Exchange, have £8.2billion and £7.16billion debts respectively.

They have also recently handed shareholders a combined £562million in dividends.

Other companies including Anglian Water, Southern Water and Yorkshire Water all have individual debts of more than £5billion.

Privatisation of the industry paved the way for foreign investors to seize control of companies, extracting billions in dividends and piling up debts.

Analysis by ratings agency Moody’s last December revealed that more than half of the sector’s debt is linked to inflation, which has risen sharply since the loans were taken out.

‘The water sector relies more on inflation-linked debt than other regulated UK networks such as power and gas,’ Moody’s said.

Last week figures showed that inflation in the UK had remained stubbornly high – at 8.7 per cent.

Martin Young, a utilities equity analyst at international bank and wealth manager Investec, said that the challenges facing the highly leveraged water companies were ‘stark’.

A Government spokesman said yesterday: ‘The sector is financially resilient. Ofwat continues to monitor the financial position of all the key water and wastewater companies.’

UK
Contingency plans being drawn up for possible collapse of Thames Water – reports


Holly Williams, PA Business Editor
Wed, 28 June 2023 

The Government is reportedly drawing up contingency plans for the emergency nationalisation of Thames Water as concerns grow over its mammoth £14 billion debt pile.

Ministers are said to be in talks about the possibility of temporarily bringing the utility company back into public hands under a so-called special administration regime (SAR).

The discussions are understood to be taking place between water regulator Ofwat, the Department for Environment, Food and Rural Affairs (Defra) and the Treasury, but the plans are at a very early stage and may not need to be put in place.


It comes after Thames Water chief executive Sarah Bentley stepped down with immediate effect on Tuesday amid mounting worries over the financial stability of the firm.

Thames Water is the UK’s biggest water supplier and provides water services for 15 million people in London and the South East.

The firm is now reportedly racing to raise £1 billion from investors to shore up its finances, with AlixPartners said to be advising the firm on turnaround plans.

Thames Water – owned by a consortium of pension funds and sovereign wealth funds – has come under pressure in recent years over its poor performance in tackling leaks and sewage contamination, while facing criticism for handing out big rewards to top bosses and shareholders.

Thames Water chief executive Sarah Bentley stepped down on Tuesday amid mounting concern over the financial stability of the company (Thames Water/PA)

Ms Bentley, who was appointed in 2020, said in May that she would give up her bonus after the company’s environmental and customer performance suffered.

But even after giving up the bonus, the chief executive managed to double her pay, raking in £1.5 million.

On announcing her departure, she said: “The foundations of the turnaround that we have laid position the company for future success to improve service for customers and environmental performance.”

Ofwat, the Treasury and Defra were not immediately available for comment.

Speaking to Sky News, children’s minister Claire Coutinho declined to comment directly on the reported plans to prepare for the possible collapse of Thames Water.

She said: “I certainly think there are water companies like Thames Water which are in difficult positions, but I think our position as Government is to make sure that we have the right policies in place to see consumers protected but also that we’re dealing with things which are really important to the country, like dealing with the sewage leaks.”

Thames Water’s owners last year invested £500 million in the firm – the first injection of equity into the group since privatisation.

They pledged a further £1 billion, subject to conditions, and warned that “further shareholder support may be required”.

The group’s shareholders include Chinese sovereign wealth fund China Investment Corporation, UK private pension fund the Universities Superannuation Scheme, and Abu Dhabi Investment Authority subsidiary Infinity Investments.

Ofwat warned last December over the financial resilience of Thames Water, as well as Yorkshire Water, SES Water and Portsmouth Water.

Thames Water chief executive quits after giving up bonus over sewage spills

August Graham, PA Business Reporter
Tue, 27 June 2023 

The boss of Thames Water has stepped down with immediate effect weeks after being forced to give up her bonus over the company’s environmental performance.

The company said that Sarah Bentley would leave the board on Tuesday, but will continue to support her interim replacement until a new full-time boss can be found.

Ms Bentley, who was appointed in 2020, said in May that she would give up her bonus after the company’s environmental and customer performance suffered.


But even after giving up the bonus, the chief executive managed to double her pay, raking in £1.5 million.

At the time Gary Carter, a national officer at the GMB union, said that Ms Bentley’s plan to give up the bonus was “nothing more than a flimsy PR stunt”.

The logo of water company Thames Water seen through a glass of water.

Because she declined it, the company never said how large the 51-year-old’s bonus would have been, but the year before her performance-related pay had reached £496,000.

Chief finance officer Alastair Cochran, who will now take over as interim co-chief executive, also gave up his bonus at the time.

He will now run Thames Water together with Cathryn Ross, the former Ofwat chief executive who joined the business in 2021.

On Tuesday chairman Ian Marchant said: “I want to thank Sarah for everything she has done since joining the company in 2020, building a first class executive team and leading the first phase of the turnaround of the company.

“On behalf of everyone at Thames, the board wishes her every success for the future.”

Ms Bentley said: “It has been an honour to take on such a significant challenge, and a privilege to serve Thames Water’s dedicated and inspirational colleagues.

“The foundations of the turnaround that we have laid position the company for future success to improve service for customers and environmental performance.

“I wish everyone involved in the turnaround the very best.”

Liberal Democrat environment spokesperson Tim Farron said: “This has to be a watershed moment for the scandal-ridden company.

“Thames Water is a complete mess and it’s time ministers stepped in to reform the firm from top to bottom.

“The days of profit before the environment must end.”

 

Thames Water creditor backs plan to break up business

Luke Barr
Wed, 17 April 2024 

Thames

A leading bondholder in Thames Water has backed plans to break up the business as it races to stave off collapse.

The prospect of carving up Thames Water is gaining momentum ahead of a rescue plan that bosses are expected to unveil on Friday.

Luke Hickmore, a fund manager at Abrdn who holds secured bonds in Thames Water, said he would support a split if it meant protecting creditors’ interests.

The Telegraph revealed earlier this month that bosses were exploring a potential break-up as part of a range of scenarios to avoid nationalisation.

Under the proposals being considered, Thames Water – which serves 16 million customers – could be divided into two separate smaller companies: one covering London and the other serving the Thames Valley and Home Counties regions.


Given its size, Mr Hickmore said Thames Water must reach a positive outcome for both “political and economic reasons”, as the risk of creditors losing out would knock confidence levels across Britain’s infrastructure sector overall.

He said: “They are one of the largest issuers in the UK. That’s a pretty important outcome for everybody, whether it be pensioners or insurance companies.”

It emerged on Tuesday that Thames bosses are also reportedly weighing a possible debt raise as it hunts for new cash to secure its future.

However, City sources played down the prospect, questioning why the beleaguered supplier would tap debt markets given it is already burdened by an £18bn debt pile.

One bondholder who recently sold out of Thames said: “It’s smoking something, right? The management team is panicking and thinking about how they can make it work and they can’t.”

A restructuring adviser involved in discussions added: “I find it mesmerising that any more debt could go in. No one would allow it. It seems crazy to my mind.”

Speculation around Thames’ finances comes weeks after parent business Kemble, which represents shareholders, confirmed it is cutting off fresh funds from the business over claims regulator Ofwat has rendered the business “uninvestable”.

It is understood there has been no dialogue between Thames Water bosses and Kemble since the announcement.

Shareholders’ refusal to fulfil a £500m funding package has pushed Thames Water closer to the brink, despite bosses’ claims that the company has £2.4bn of funds to see it through the next 15 months.

A collapse into special administration – where the Government steps in to keep the company operating – has grown increasingly likely in recent weeks, with the supplier yet to convince Ofwat that it must increase bills by 40pc in order to ensure long-term profitability.

According to sources close to the company, a taxpayer bailout could cost £5bn “just to keep the lights on”.

A Thames bondholder said: “We’re all running scenarios every morning and worrying about whether they are going to go through a special administration regime.”

It is understood that breaking up the business would make it easier for Thames’ operations to be sold on to a rival once stabilised.

Colm Gibson, managing director at Berkeley Research Group, said: “It is far from certain that Thames Water would emerge from special administration as a single large company. It is entirely possible that it could be broken up into a series of smaller water companies serving local areas.”

The Government is reluctant to intervene in the handling of Thames Water given the looming election, which could make it a problem for Sir Keir Starmer if Labour succeeds at the polls later this year.

This has already led to talk across the industry that Labour is in favour of a break-up, although the party rejected the speculation Wednesday.

Last week, Chancellor Jeremy Hunt said it would be “utterly outrageous” for Ofwat to grant Thames Water’s demands for higher household bills.

He said shareholders in the company “had an obligation to sort out the mess” when asked whether they had a duty to inject more cash into the business.

Thames Water declined to comment.

Traders bet on Thames Water crisis contagion as firm races to agree survival plan


Lars Mucklejohn
Wed, 17 April 2024 

Rishi Sunak's government is facing a political headache as it may be forced to temporarily nationalise Thames Water

Traders at major US hedge funds are betting against the debt and equity of British water companies amid fears over their levels of debt and the risk of contagion across the sector sparked by the crisis engulfing Thames Water.

Millennium Management had disclosed a short position on northwest-focused United Utilities, while Arrowstreet Capital has bet against the southwest’s Pennon. United Utilities has the most debt of any UK water company behind Thames.

Bloomberg, which first reported the news, cited data from S&P Global Market Intelligence showing that short interest on United Utilities had jumped to almost seven per cent on 12 April from two per cent last July.


Meanwhile, short interest in Southern Water bonds jumped to 6.6 per cent this week from roughly 0.8 per cent at the start of the year.

Debt is commonplace across the water sector. Suppliers have collectively amassed more than £51bn in net debt in the 32 years between privatisation in 1991 to March 2023, according to research by the Financial Times.

Even as the sector has come under increasing scrutiny, debt has continued to rise. In the past two years alone, the figure has jumped £8.2bn.

The government is facing the costly prospect of having to temporarily nationalise Thames, which is the UK’s biggest water supplier with some 16m customers, to prevent it from collapsing.

The firm is struggling under a £15.6bn debt pile, which has become increasingly difficult to service amid higher interest rates.

Regulator Ofwat last month rejected Thames’ plan to hike bills by 40 per cent to help ease its debt pile, causing shareholders to pull £500m of emergency funding. The crisis worsened earlier this month when Thames’ parent company Kemble defaulted on around £1.4bn worth of debt.

Thames Water now has under two months to convince Ofwat that it has a feasible survival plan before it publishes a determination on how much water companies can charge customers on 12 June.

Whether Thames can strike a deal with the regulator will be a crucial signal on how likely it is to attract new equity investors and avoid falling into special administration.

Royal London, among the asset managers most exposed to Kemble’s bonds, has argued that if the government takes over Thames, and triggers losses for bondholders, it could deter much-needed investment from other infrastructure assets.

Kemble is expected to miss its repayment deadline for a £190m loan to a consortium of four banks, including two state-owned Chinese lenders, at the end of this month.

Thames has said it has £2.4bn of liquidity available and can still meet its commitments until at least May 2025. However, high borrowing costs and fines from Ofwat risk significantly shrinking this cash pile.

Thames declined to comment when approached by City A.M.

Thames Water to add to debt mountain in bid for survival


Alex Lawson and Anna Isaac
Tue, 16 April 2024 
The Guardian

Ongoing water pipe work in London. Thames Water already has £15.6bn of debt.

Photograph: Leon Neal/Getty Images

Thames Water is preparing to tap debt markets within weeks in an attempt to fund a rescue plan and repair its threadbare finances, the Guardian can reveal.

It is understood the embattled water company is planning to publish a revised five-year spending plan within days, before a deadline next month. Its board is expected to meet on Thursday to rubber-stamp the plan, and executives hope to release it on Friday.

Sources said the company then intends to wait for up to a week before approaching lenders to fund the proposals and has sought advice from City bankers and lawyers on the debt issuance. Financiers said the proposed timing of the fresh borrowing was surprising, given huge uncertainty around Thames’s future.

Britain’s biggest and most heavily indebted water company is fighting to secure its financial future, and has already said it only has cash reserves to fund its operations for the next 15 months without a substantial increase in bills.

Thames’s plans to raise fresh debt come despite it labouring under a £15.6bn debt pile. Its parent company, Kemble Water Finance, missed an interest payment earlier this month, and said it will not be able to repay a £190m loan due by the end of April.

Its shareholders also recently backtracked on plans to inject £500m into the business amid a standoff with the industry regulator, Ofwat. The investors, which include USS and Omers, said Thames’s original business plan was “uninvestible” (sic) and demanded Ofwat allow it to raise bills sharply, levy lower fines and pay dividends.

The company plans to republish the spending plan covering 2025 to 2030, which was first submitted to Ofwat last October, to allow regulators and investors to scrutinise it. Thames then intends to give markets a few days to settle and “absorb” the information before pushing the button on the debt plan, sources said.

Thames’s original plan was to raise bills by 40% to fund an £18.7bn investment programme. However, the size of its investment plan is expected to be revised upwards by between £1bn and £1.5bn, with the £1.5bn more likely.

It is unclear how much of the extra funds Thames hopes to raise through issuing new debt, but sources said it would have to be sizeable given the scale of its funding needs.

Sources said that Thames, which has 16 million customers across London and the Thames valley, hopes to price the bonds in late April, before issuing the debt formally in early May.

Lenders signing up to the debt issuance could be taking a gamble, however, as it is unclear how much Ofwat will allow Thames to raise through higher consumer bills.

Ofwat is due to publish its draft response to Thames’s plan on 12 June, with water companies’ plans not signed off until December. The Guardian revealed this week that the company had six weeks to convince the regulator that it had a credible survival plan for its business,before an Ofwat board meeting on 23 May.

Ofwat is understood to be sceptical that Thames’s current business plan is viable or fair on consumers and is demanding a separate turnaround strategy for reforms to its management and governance.

The company could be hamstrung by the relatively small pool of debt and equity investors in the UK water sector, and the high-profile concerns expressed over Thames’ future. Bonds in its parent company are trading at a steep discount after its default.

Other possible scenarios include a renationalising the company, an attempt to find new shareholders – potentially through a stock market float – a debt-for-equity swap and a breakup of the company.

Although Thames’s operating company has £15.6bn of debt, the wider group has borrowings of more than £18bn across in its byzantine corporate structure.

Thames’s financial troubles have drawn further attention to the stewardship of the company by Macquarie, the Australian bank that previously owned the water supplier and which has been heavily criticised for building huge debts at Thames while paying dividends to shareholders.

The company’s current backers include the Canadian pensions firm Omers; the UK university staff pension scheme; a subsidiary of the Abu Dhabi sovereign wealth fund and China’s sovereign wealth fund.

Thames Water declined to comment.

UK

Southern Water and Thames Water ‘standout poor performers’ driving complaints

THATCHER PRIVATISED WATER

Josie Clarke, PA Consumer Affairs Correspondent
Wed, 4 October 2023 



Southern Water and Thames Water were the “standout poor performers” driving customer complaints over the past year, a watchdog has reported.

The Consumer Council for Water (CCW) said the more than 20 million people served by Thames Water and Southern Water were being “let down” by the two firms’ “failure to understand and deal with the causes of high levels of complaints from their customers”.

CCW said the industry’s overall performance was skewed by the number of complaints made by households to Thames Water and Southern Water.


Complaints received by Southern Water were almost three times higher than the overall average for water and sewerage companies, while Thames Water’s were just over one-and-a-half times higher.

Thames Water was the only water and sewerage company to be marked as poor for both the number of complaints it received and its complaint handling.

It was also the worst performing company for billing disputes and the number of complaints that could not be resolved at the first time of asking.

Southern Water was the most complained-about company, with the rate of complaints per 10,000 connections almost twice as high as Thames Water, while it was rated worse than average for how these were handled.

Among the smaller water-only companies, South East Water scored poorly for both the number of complaints it received and how these were handled, and Cambridge Water generated three times as many complaints to CCW than last year.

Among the best performers were Wessex Water, Hafren Dyfrdwy, Bristol Water and Portsmouth Water.

Overall, households made 232,817 complaints to water companies in England and Wales during 2022/23, with problems relating to billing and charges accounting for almost half (47%) of them.

Issues with water services made up 30% of complaints, with these rising significantly during the summer drought of 2022, when six suppliers introduced hosepipe restrictions.

Some 22% of complaints were about wastewater services, falling as a proportion due to fewer instances of extreme wet weather and flooding incidents during the winter months.

CCW said it had seen a 29% rise in complaints brought to it after water firms had been unable to resolve them during the first quarter of 2023/24 compared with the previous quarter.

CCW chief executive Dr Mike Keil said: “Trust in the water sector has never been more fragile and the task of rebuilding it is made all the more challenging when companies perform as poorly as Thames Water and Southern Water.

“We’re especially concerned that these two companies have not performed well across all the main causes for people to complain and that Thames, in particular, is compounding customers’ frustrations with delays and a failure to resolve many issues first time.

“Customers have a right to expect better from such an essential utility provider where switching supplier is not an option.”

Thames Water retail director David Bird said: “We’ve been working hard to turnaround our performance and have reduced our total household complaints by 28% compared to last year alongside a large reduction in telephone complaints.

“We’ve completed the onshoring of our customer service call centre in Swindon so we can be closer to our customers and deliver the reliable and better-quality service they deserve.

“We are also investing additional resources to improve our response times to customers and to reduce the need for second-stage complaints.

“Our aim is to always deliver brilliant customer service and we’re determined to do better.”

Meanwhile, Katy Taylor, chief customer officer at Southern Water, said: “We recognise that we need to do better at serving our customers and fixing their problems.

“We are investing in video diagnostics, upskilling our customer service agents and keeping our customers regularly informed when issues take longer to fix.

“While we are seeing early signs of improvement in the quality and speed we deal with their queries, we know we still have a lot of work to do and are committed to significant improvements.”

A Water UK spokeswoman said: “Companies worked hard last year to support customers and maintain infrastructure through an unprecedented drought and record-breaking temperatures, and it is good to see that complaints to the ombudsman remained stable.

“Complaints about bills are increasingly being resolved by companies themselves, with an 8% reduction in these types of complaints being escalated to CCW. However, we appreciate that many customers remain concerned about their bills, which is why we have announced plans to more than double the number of households eligible to receive support, rising to 3.2 million households.”

OMERS PENSION IS THE SHAREHOLDER

Thames Water secures £750 million cash injection from shareholders
By Peter Davison
10 July 2023

Thames Water workers using high pressure water jets to clear a blockage

Thames Water has secured £750 million from its shareholders as it fights to fight off nationalisation.

The news came in an announcement to the London Stock Exchange today (Monday). The company said it aims to raise a further £2.5 billion between 2025 and 2030.

Read more: Government prepares for possible collapse of Thames Water

Thames Water's future came under the spotlight in June when its chief executive Sarah Bentley unexpectedly stepped down after just two years in the role.

There was speculation that the Reading-headquartered utilities giant – which serves 15 million customers in Swindon & Wiltshire, Berkshire, Oxfordshire, Gloucestershire, and in London – could be taken into temporary nationalisation if it could not service its £14 billion debts.

In annual results published today, the firm reported an underlying pre-tax loss of £82.6m for the year to 31 March.

https://financialpost.com/fp-finance/omers-bci-risk-reputation-hit-from-thames-water-investments

OMERS, BCI risk reputation hit from Thames Water investments 

4 days ago ... The Ontario Municipal Employees Retirement System (OMERS) and British Columbia Investment Management Corporation (BCI) own 31.8 per cent and and ...

https://community.ionanalytics.com/omers-in-talks-with-lps-about-thames-water-rescue

OMERS in talks with LPs about Thames Water rescue 

3 days ago ... As well as owning a direct stake in Thames Water, the Canadian pension fund also manages stakes in the water company owned by several large ...

https://www.bbc.com/news/business-66079676

Big Thames Water investor backs turnaround plans - BBC News 

Jul 2, 2023 ... Thames Water is a private company, owned by a group of investors, with the largest being the Canadian pension fund, OMERS, with 31.8%.

https://www.omersinfrastructure.com/portfolios/thames-water

Thames Water - OMERS Infrastructure 

Thames Water is the largest provider of water and wastewater services in the U.K., serving approximately 10 million water customers and 15 million ...

THATCHER PRIVATIZED WATER

Thames Water debt crisis threatens taxpayer with multibillion-pound bill

ONTARIO PUBLIC SECTOR PENSION FUND; OMERS, 

IS A MAJOR SHAREHOLDER

Ben Marlow
Fri, 16 February 2024 

Thames Water

The debt crisis at Thames Water risks a bill for taxpayers running into the billions of pounds, according to contingency plans being drawn up to avert disruption to supplies.

It is feared that regulatory rulings will prompt the company’s shareholders to pull the plug in the coming months.

Sources close to the situation said that by refusing to invest they would force Thames Water into special administration, where it would immediately require a hefty slug of public money to keep contractors on the job and supplies flowing.


The concerns are being stoked by the belief that the industry regulator Ofwat is poised to block a request from Thames Water to hit one in four homes with a 40pc jump in bills.

The company’s shareholders, which are led by the Canadian pensions giant Omers and the Universities Superannuation Scheme, have made further investment dependent on approval.

Thames Water has asked its backers for a cash injection of £3.3bn. Ofwat could also hit the company with hundreds of millions of pounds of fines, however.

Without the shareholder cash there are concerns that Thames Water would be unable to service its giant debt pile at a time when the beleaguered utility must find billions of pounds to repair its leaky network of pipes and sewers.

The mounting crisis is already prompting moves in Whitehall. Water company insolvency laws are currently being amended to make it easier for the Government to step in, including on the grounds that it has fallen short of performance targets.

If Thames Water is put into special administration, it is estimated that as much as £5bn of financial support would be needed from the outset “just to keep the lights on”, according to a Whitehall source. Without immediate Treasury guarantees, critical contractors could down tools, it is feared.

Sources close to the discussions cautioned that they remain at the contingency planning stage and administration could be averted if Ofwat gives the green light to ramp up bills over the next five-year cycle, starting in 2025.

A decision is expected by June. The special administration regime has been used before when the energy supplier Bulb went bust in 2021. It was eventually sold to Octopus Energy.

Thames Water is struggling under the weight of borrowings of nearly £19bn. Last year its auditor warned it could run out of cash by April.

Its troubles have spooked the debt markets, prompting a sell-off of its bonds that has left prices at all-time lows. The value of a bond linked to an entity in Thames Water’s sprawling corporate structure has crashed to less than 39p in the pound. Seven months ago the IOUs were changing hands for 87p.

Thames Water previously announced that it had secured an initial £750m of new equity into the company by 2025 subject to conditions. However, in December, finance director Alastair Cochran was forced to admit that the funds were still to be confirmed.

“Investors are looking for some comfort from Ofwat that it will support that business plan,” Cochran said at the time. “They will take a pragmatic view depending on the feedback they get.”

Investors have also asked Ofwat to agree to less punitive fines for missing pollution and other performance targets.

In October, it was named among the industry’s worst performers in the watchdog’s annual review for a third year. It came just weeks after Thames Water was hit with a £101m fine for “lagging” in its efforts to clean up pollution, plug leaks and improve customer service. The penalty was later reduced to £73.8m.

Ofwat is also investigating whether Thames Water broke a new licensing agreement by paying a £37.5m dividend that ultimately ended up with the company’s parent.

If it is found to have breached the rules it could face a fine equivalent to 10pc of turnover. The company reported revenue of nearly £2.3bn last year.

A Thames Water spokesman said: “We take our licence obligations very seriously, including those relating to the declaration and payment of dividends. Our plans assume no external dividends to shareholders until at least 2030, to support our turnaround.”

On Friday, Sir Adrian Montague quit as chair of Thames Water’s parent company Kemble. Regulators had reportedly raised concerns that the board of Kemble and Thames were not sufficiently independent from each other, particularly with Montague chairing both companies.

Industry sources believe Thames Water could also be facing a steep penalty for storm overflow failures.

A Government spokesman said: “We prepare for a range of scenarios across our regulated industries – including water – as any responsible government would.”

Ofwat declined to comment.

Thames Water's Debt Crisis Is Just The Beginning

By City A.M - Jul 04, 2023

• Thames Water, UK's largest supplier, is facing a financial crisis, with its £13.7bn debt signalling industry-wide issues as other suppliers collectively accrue arrears of £65bn.
• 
  
• The precarious financial health of the industry is causing investors to turn away, with company credit ratings dropping to a 30-year low and increasing regulatory risks predicted.
• 
  
• The crisis has sparked discussions about potential solutions, including nationalisation, with a majority of Britons supporting this, and turning suppliers into 'social purpose' vehicles with tighter regulations.
• 
  

Thames Water’s travails have taken the media spotlight in recent days, and deservedly so, with growing fears the country’s largest supplier could be on the verge of collapse. Shareholders injected £500m into the company in March, and committed to a further £1bn in funding before discussions later faltered – with chief executive Sarah Bentley abruptly stepping down last week, and the supplier bringing in crisis manager Sir Adrian Montague as its new chairman.

It recognises the suppliers ”significant issues to address” including the “need to improve their financial resilience” but also pointed to the group’s ”strong liquidity position….. with £4.4bn of cash and committed funding”.

However, the government appears unconvinced with Whitehall and regulator Ofwat now reportedly drawing contingency plans – similar to the crisis measures brought in to protect Bulb Energy when it fell into de-facto nationalisation.

Reflecting the scale of such a rescue plan, Bulb had one-tenth of Thames Water’s 15m customers, and cost £3bn in gross funding to support the fallen supplier on life support with transfusions of public cash.

Who could be next?

The company’s £13.7bn debt pile is not unique in the industry, even if it places Thames Water top of the pops among its peers.

Debt is commonplace across the water sector, with suppliers collectively accruing arrears of £65bn despite widespread underinvestment – including £54bn across the big nine suppliers between 1989 and 2022.

Rounding off the top five are United Utilities (£8.2bn), Severn Trent (£7.2bn), Anglian Water (£6.5bn) and Yorkshire Water (£5.7bn).

Over the same time period, they paid £66bn out to shareholders – averaged £2bn per year since privatisation over three decades ago.

Just last week, Yorkshire Water also reported a £500m successful scramble for funds.

The firm said the move was part of a long-term equity plan, playing down the prospect of problems at the supplier – but with its debt levels any move it makes is rightly scrutinised.

Especially when the debt ratios are also so high.

While Thames Water’s 80 per cent leverage is significant, it barely contrasts with other suppliers – with South East Water reporting a leverage of 74.8 per cent while Affinity Water has a ratio of 74 per cent.

Now, the consequences of this are being felt with the country’s creaking, leaking pipelines insufficient to cope with rising demand from a growing population and warmer summer weather and colder winters over the past two decades.

Thames Water is far from alone in accruing huge debts in the industry

Investors turn away from water sector

Ofwat’s industry reports reveal that of the UK’s 17 water companies, only three had a gearing ratio below the 60 per cent – which the watchdog considers a healthy target range for debt levels.

Jefferies is unimpressed, warning that “Thames Water’s financing situation exacerbates the challenges facing the water sector.”

The investment analyst fears the “sector faces an increasingly difficult challenge of balancing the growing need for environmental capex with customer affordability, whilst also enhancing its financial resiliency.”

Meanwhile, company credit ratings across the have dropped to their lowest levels in 30 years.

It is now predicting further regulatory risks for the industry, and recommends a close-to-nil premium on trading in listed water companies.

Thames Water is home to multiple stakeholders – a complicated set-up for a supplier under scrutiny

This financial shakiness across the entire industry means its difficult to predict which supplier is next to report difficulties, but it also means its hard to make a case for any of them being in particularly healthy shape – despite Ofwat and Water UK attempting to reassure customers.

What also makes it more challenging is that six of England and Wales’ water companies are either owned or controlled by overseas investors.

In the case of Thames Water –its backers include Canadian pension giant Omers as its largest stakeholder, but also features the Chinese Investment Corporation – a state-backed vehicle – and Infinity, a UAE-based group.

While Thames Water investor Universities Superannuation Scheme has publicly lent its support to the company – City A.M. has approached every other investor in the company and so far received no comments, creating a deafening sense of silence over the supplier’s fortunes.

However, with such high debt burdens, it is difficult to have such certainty in any supplier’s future.

What happens now?

Liv Garfield, chief executive of Severn Trent, has invited other utility chief executives to an “off-the-record roundtable” with economist Will Hutton.

In confidential emails first reported by the Evening Standard, she outlined proposals for suppliers to remain privatised but be reformed as ‘social purpose’ vehicles with more stringent regulations funding and environmental concerns such as leaks.

She added, she has been in discussions with Labour – which is widely tipped to win next year’s election and are over 20 points ahead in the polls – over reforming the sector.

Business and trade committee chair and Labour MP Darren Jones declined to lend his support re-nationalisation last week, recognising that it was an “option, but not necessarily the right one.”

In his view, the problem was not the ownership model, but instead the behaviour of “the directors and the shareholders who own and operate these businesses.”

However, nationalisation is now increasingly popular with the British public, with seven in ten supporting taking water companies back into public ownership according to YouGov polling.

Brits are increasingly supportive of re-nationalising the water industry

So far, Therese Coffey, environment secretary, has been absent from the debate, having unveiled a new industry plan for water earlier this year which included unlimited fines for sewage dumping.

Chancellor Jeremy Hunt met with Ofwat last week, with the regulator agreeing to push suppliers further help vulnerable customers.

But there is still the painful possibility of higher water bills, raising the prospect of potentially 40 per cent higher bills to tackle sewage leaks, increased demand and climate change.

Water UK has also confirmed to City A.M. that households will have to foot the bill for companies’ £10bn plans to tackle storm overflows this decades

Supplier – chief executive	Pay (salary, bonuses, dividends)
Liv Garfield – Severn Trent	£3.2m
Steven Mogford – United Utilities	£3.2m
Sarah Bentley – Thames Water*	£2m
Liz Barber – Yorkshire Water	£1.4m
Peter Simpson – Anglian Water	£1m

Top five highest paid water industry bosses (Source: Companies House reports)

Currently, 20 per cent of UK water bills each year pay dividends and interest payments, according to the Competition and Markets Authority.

This comes with executive bosses also facing criticism over pay, with Liv Garfield the highest paid chief executive in the industry.

Thames Water’s struggle for cash is likely to drag on for days and weeks, but the latest event to keep an eye on is tomorrow’s committee session in Westminster – with the House of Lord’s industry regulatory panel set to grill Ofwat’s chairman Ian Coucher and chief executive David Black over the state of the industry.

The following week, the MPs from the House of Commons’ environment, food and rural affairs committee will also grill Ofwat, alongside Thames Water and environment under-secretary Rebecca Pow.

This might give us some answers to questions over sewage leaks, company performance, customer service, and how the industry ended up with a vast debt mountain that threatens the entire sector.

By CityAM