Thames Water is racing to secure a £3bn lifeline as the struggling water company battles for financial survival.
The fresh funds are meant to act as “liquidity bridge” to “stabilise the business” and give it time to secure long-term investment, its chief executive, Chris Weston, said on Friday. It will further balloon its operating company’s debt pile, taking it to £17.9bn by March next year, Alastair Cochran, Thames’s chief financial officer, said.
In a signal of shaky market confidence in the company, the new debt is expected to come with double the borrowing costs Thames had previously secured from markets. The company said that the yield on its new debt of about 15% was in line with other transactions “of this nature”.
Britain’s biggest water company revealed on Friday that it was working on a plan with creditors to secure an initial £1.5bn of new money, enough to allow it to operate until October 2025.
A further £1.5bn would be made available, across two tranches of £750m, if Thames Water makes an appeal to the Competition and Markets Authority (CMA) over the industry regulator Ofwat’s final decision on how much water companies can increase bills by over the next five years.
If Thames cannot raise more money and becomes insolvent it could be placed into a form of temporary nationalisation, the so-called special administration regime (SAR). This is aimed at maintaining essential services for consumers. It has triggered a public debate about whether Thames’ existing creditors ought to have their loans wiped out if SAR is used. Thames has already breached its licence to operate due to its poor debt status.
Thames previously warned that it could run out of cash by the end of December after revealing in September that it had about £1.6bn left.
It has several hoops to jump through before it can secure the new funding, which it will be allowed to tap on a month-by-month basis. It will need approval from the lion’s share of its creditors, 75%, and the courts.
The liquidity extension deal has already been backed by creditors representing £6.7bn of debt, with other creditors now having until 11 November to back the proposal.
Still, there are divides between different groups of creditors about the best way forward for the company.
A group of class B bondholders – separate to creditors with class A bonds who account for most of Thames’ debt – had made a better offer with a cheaper cost of borrowing, sources close to the talks told the Guardian. They claimed Thames was letting itself fall victim to “vulture rates” if it follows through with the deal it announced on Friday. The group intends to continue negotiations with the water company.
Ofwat, is set to make a final decision on future bill increases in December, although this could slip to January.
Thames has argued that it needs average annual bills to rise by 53% by 2029-30 but if Ofwat blocks this it has the option to go to the CMA to challenge it.
The water company, which serves 16 million customers, has said the new injection of cash would allow it to continue with planned investment, maintenance of infrastructure and meeting its environmental obligations.
Weston said: “Today’s news demonstrates further progress to put Thames Water on to a more stable financial footing as we seek a long-term solution to our financial resilience.
“We are working closely with and have the support of our creditors, enabling Thames to continue to implement our turnaround plan so that we can deliver better results for our customers and the environment while seeking to attract new capital into the business.”
The new debt deal would take Thames Water’s gearing – a ratio of its debt to equity and a measure investors use to weigh a company’s financial stability – to about 85%, Cochran said. This is more than 15 percentage points greater than the average for water companies in England and Wales.
An Ofwat spokesperson said: “Ofwat has been clear that Thames Water needs to pursue all options to seek further equity to fund its turnaround for the benefit of customers and the environment.
“Today’s announcement is a positive step towards extending its liquidity runway and seeking a market-based solution to the company’s problems. Safeguards are in place to ensure that services to customers are protected, regardless of the issues faced by Thames Water.”
