Thames Water vans are parked on a road as repair and maintenance work takes place in London, on April 3.Toby Melville/Reuters
Thames Water is pursuing talks with some of its creditors about a 1 billion pound ($1.34 billion) lifeline to give it space to restructure 16 billion pounds of debt and avoid the threat of administration, two sources with knowledge of the matter said.
Britain’s largest water company warned last week it could run out of money in three months if the majority of its creditors do not approve further borrowing to tide it over.
Without a clear rescue plan, the government or the water regulator could decide to place Thames Water into a so-called special administration regime (SAR) to ensure it continues to serve 16 million people in London and the surrounding region.
The crisis is coming to a head as Britain’s new Labour government seeks billions of pounds of capital to upgrade the country’s infrastructure, with water only one entry on a long list that also includes power grids, rail and roads.
If Thames Water did end up in administration, the likely debt holder losses could shake wider investor confidence and raise the cost of financing for other water companies.
To avoid a SAR, Thames Water is in talks with one group of creditors on an interim liquidity facility of up to 1 billion pounds, with a deal possible within weeks, the two sources said.
This line of credit would be key to keeping Thames Water going until it can agree a longer term debt restructuring and raise up to 3.25 billion pounds in new funds, they added.
At the same time, this group of holders of approximately 10 billion pounds of Thames Water bonds are working to find an equity solution and enlist a partner with capital and credibility in infrastructure investment in case the company is not able to resolve the issue itself, one of the sources said.
The company is working separately with investment bank Rothschild and law firm Linklaters to raise the new money itself and has sounded out potential investors, five sources said.
Thames Water and its largest organized group of creditors also aim to have its rescue plans ready soon, with court dates booked for November and December for a potential restructuring deal to be approved, three sources said.
Adding to the pressure, the company has 530 million pounds of debt due to expire next month, although a source close to the matter said it was very confident this would be rolled over.
Regulatory regime
Restructuring talks are likely to be complicated by the involvement of three main groups of creditors and an impending decision by water regulator Ofwat which will determine Thames Water’s investment plan and tariff rates for its customers.
There are discussions going on between Ofwat and the main group of creditors about the final decision, one of the first two sources said. The regulator’s new regime was due to be finalized in December, but could be delayed until January.
Investors are asking for an improvement in Ofwat’s draft determination published in July, the sources said.
If Thames Water and Ofwat were able to reach an agreement that avoided SAR, it would save the government a major headache.
The rules governing what happens when water companies get into financial difficulty, which require the High Court to appoint the special administrator, were changed earlier this year by the previous government and are as yet untested.
They could end up with the company or its assets being transferred to another entity, or even liquidated and dissolved.
For Thames Water to keep going in its current form it needs to recover its investment-grade credit ratings, having breached the terms of its licence when it lost these.
Moody’s downgraded
Thames Water rating deeper into junk territory on Wednesday, the second time in two months, after raising doubts about the country’s largest water provider securing new equity funds to stay afloat.
“In the medium term, inability to attract new equity funding may ultimately lead to a creditor-led debt restructuring or one that is imposed as part of a special administration process,” Moody’s said.
There is also a second group of creditors comprising nearly 20 commercial banks, with a combined exposure of more than 3.5 billion pounds, which is being advised by Perella Weinberg and A & O Shearman.
A third group, including banks and pension funds, who hold about 1.5 billion pounds of debt at Thames Waters’ more junior holding company Kemble are being represented by Moelis and Freshfields, three of the sources said.
A spokesperson for Thames Water referred to the company’s previous public statements.