A problem like Thames Water is everyone’s problem. People with only a passing interest in finance will still feel the ripple effects should it become insolvent.
It won’t be because the water stops coming out of the tap or the cleanliness of Britain’s rivers – so clearly scarred by the effects of creaking infrastructure and raw sewage – worsens.
It will be due to the rising cost of investment, a burden borne by the private sector, and, by extension, households and businesses. If the company collapses, a slice will be trimmed from many British pensioners’ pots, managed by mega funds that are owners of Britain’s water companies.
Whether or not the crisis triggers a full-blown nationalisation and pulls a water company on to the government’s balance sheet is uncertain. But the odds are clearly going in that direction.
Ofwat, the water industry watchdog, has “far less time to find a solution than it thinks”, one major bond investor in Thames told the Guardian. Another lender to the operating company said “there are six weeks left to save it”.
So grim is the outlook for bondholders at Thames’ operating company that the Investment Association, the trade body for fund managers, has already issued a rallying call to Thames’ lenders, laying the groundwork for intensive lobbying of the government and, ultimately, potential legal action. This work is only preliminary for now but it indicates the potential fightback against Ofwat and the Treasury by investors should Thames’ entire operation run aground.
A light was shone on Thames’ notoriously complex ownership structure when a holding company – Kemble – defaulted on a debt repayment. It is widely expected to go bust, collapsing one storey of a fragile house of cards.
What matters now is whether or not the ringfenced operating company, the part that is regulated by Ofwat, stays solvent.
Many different groups hope it staves off insolvency. Chief among them are Ofwat, the Treasury, and lenders to Thames’ operating company. But it is also laden with about £15bn debt, which is increasingly expensive to service. Appetite to pump more money into the part that keeps the taps on is going to depend on two things: whether or not bills can rise by enough to make a return attractive enough for investors to put in fresh money, and whether Thames can convince Ofwat that its efforts to reform itself – with a new and improved turnaround plan – can justify that bill hike.
How much Thames’s 16 million customers have to pay for their water depends on this negotiation. Thames’s owners want to raise bills by 40% and it would probably not be the only company in England to push through bill increases of that scale if it can persuade Ofwat it has changed its ways. On average bills are already expected to rise by 35%.
Thames can only hope to raise its bills if there is enough heft in its plans to change how it manages its assets and governs the business. It must convince Ofwat that those Victorian pipes it claims to be mending are really getting replaced, and that shiny efforts to build super sewers really do lead to a new and effective wastewater system that does not spill sewage into rivers and streams each time the rain comes down.
What is unclear is just who might come forward with the necessary cash even if the bills and governance can be straightened out. Ofwat and the Treasury are desperate to keep attracting the kind of patient cash that pension funds and long-term investors offer. Thames’s travails will be watched closely by the nimble, global mega funds that Britain needs to overhaul and upgrade its infrastructure, from power lines to new windfarms.
A plausible turnaround plan could sway Ofwat’s thinking on whether or not a bill hike will actually achieve results. And Ofwat wants those investors committed for the long haul – a 25-year, rather than five-year, horizon.
There is no single, universal view about how to press ahead among the shareholders of Kemble, the holding company of Thames’ operating arm. Many of the investors in Kemble’s debt and equity are also creditors to the operating company.
Some investors are more amenable to finding a way through than others. Quiet words in quiet corners are under way.
Time is short, however. One of the major indications that bondholders in the operating company are waiting for is Ofwat’s decision on Thames’ bill increases, expected in June. That verdict must be taken by the regulator’s 23 May board meeting. In the view of some major bondholders, that leaves only six weeks to save their investment in the water operating company.
Ofwat declined to comment on “speculation” but said it was working on its draft decisions, due in June. “We will continue to monitor Thames Water as it seeks to turn around its performance for customers and the environment,” a spokesperson said.
According to the company’s internal estimates, Thames believes it can operate for 15 months based on its current spending plans, even without fresh investment. But Thames’ problems will come home to roost well before then.
