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Thames Water has asked its creditors for up to £3bn in emergency financing to avoid renationalisation next year and one of the biggest corporate insolvencies in recent British history.
The UK’s largest water and sewerage provider, which serves 16mn households in London and surrounding areas, said it was seeking to borrow funds to allow it to keep operating until October next year.
The proposals have been tentatively agreed with the creditors involved, who are the largest holders of some of Thames Water’s most senior debt and include hedge fund Elliott.
They would charge interest of 9.75 per cent a year on the funds, far above market rates for most loans, and would also be paid fees.
But Thames Water also needs a decisive majority of its other lenders to agree to extend existing debt by two years and to consent to the new loan arrangements.
The company is struggling to service its existing £19bn debt and has warned that it could run out of cash by Christmas.
If it were to collapse and be renationalised under the government’s special administration scheme it could have a knock-on impact on other cash-strapped water groups.
Chris Weston, chief executive of Thames Water, said the additional borrowing was the “best option available” and “would allow it to carry on investing in our infrastructure and providing the services that we do”.
Under the proposals, Thames Water would borrow an initial £1.5bn that would last until October 2025.
A further £1.5bn would be released if industry regulator Ofwat did not give permission to Thames Water to increase bills as much as it wants and other changes.
The company has asked for a 53 per cent increase in bills by 2030, with a final Ofwat decision expected by December or January.
It has also asked for leniency from regulators as it seeks to deal with £500mn in penalties, fines and costs related to investigations over sewage pollution and other infrastructure problems.
Thames Water is separately seeking to raise at least £3bn of equity from investors after its existing shareholders — a group of pension funds and sovereign wealth funds — declared this year that the business was “uninvestable” and were prepared to walk away.
It said on Friday that, although the first round had been launched, the equity increase would not be concluded until the beginning of next year.
The Financial Times reported on Friday that Castle Water, a company co-founded by Graham Edwards, Conservative party treasurer, is examining providing new equity funding and has signed a non-disclosure agreement with the utility’s advisers.
In the discussions on emergency debt financing, Thames Water’s creditors are offering to provide the funds on a “super senior” basis. That would rank it ahead of all of Thames Water’s existing debt in an insolvency or special administration.
While interest payments will continue, Thames Water will also ask bondholders to loosen some of its debt’s restrictive covenants to help “facilitate a subsequent recapitalisation transaction”. Thames Water said it had secured a hearing on December 17 to approve the plan.
Thames Water said the rest of its class A and lower-ranking class B bondholders “will have the opportunity to participate” in the new super senior loan.
A group of class B bondholders separately proposed their own equivalent loan with a lower interest rate of 8 per cent earlier, the FT has previously reported.
One person close to the class B bondholders said the £3bn plan hammered out with senior creditors was expensive “predatory lending” and would leave much of the debt in the control of activist hedge funds. “It is surprising that Thames was not willing to consider a more affordable alternative,” the person said.
Thames Water said funding under the new loan would be released on a monthly basis, subject to the utility showing progress in agreeing a more comprehensive “recapitalisation transaction”.
Ofwat said it was a “positive step” towards “a market-based solution to the company’s problems”. It added: “Safeguards are in place to ensure that services to customers are protected, regardless of the issues faced by Thames Water.”
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