Thames Water creditors back £3bn funding deal

Thames Water has secured the crucial backing of three quarters of its highest-ranking debtholders for an emergency £3 billion loan in an attempt to avoid a renationalisation.
Britain’s largest water and sewerage group said that 75 per cent of its top-ranked class A creditors had agreed to the refinancing, which will also alter the terms of its debt agreements.
The plan would give the embattled utility enough cash to keep operating until October next year after it warned this year that it could run out of money by Christmas.
The creditor group, which represents holders of more than £12 billion of class A debt, said it was a “decisive vote of confidence” in the first stage of its plan.
“It shows that there is a genuine will to develop a market-based solution which saves UK taxpayers from shouldering the costs of special administration,” a spokeswoman for the creditors said.
The refinancing is subject to court approval.
The cash will be released to the company each month, subject to conditions which include progress towards “a more holistic recapitalisation” next year. The company is now working on raising about £3.25 billion in equity, which will run “in parallel” with the debt restructuring plan.
Thames supplies water and wastewater to 16 million customers in London and the Thames Valley. It has fallen into financial crisis after years of recurring fines for pollution, leaks and poor service and has been struggling to service a debt pile that has risen to almost £16 billion. By April, its debt is expected to have risen to £17.9 billion, which equates to gearing of about 85 per cent.
It has lost the confidence of the credit rating agencies and in March its nine international investors refused to inject more funds, calling Thames “uninvestable”, and wrote off their investments. This left the company on the brink of collapse and put the government on standby for nationalisation via a special administration regime.
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The funding proposal comprises an initial £1.5 billion, which will be released in January if the refinancing is approved. Thames will pay an annual interest of 9.75 per cent on the debt.
An additional £1.5 billion will be released if Thames successfully appeals against a determination by Ofwat, the industry regulator, on how much it can raise customer bills, which is due in the next couple of months.
Thames has told Ofwat that it wants to increase average bills by 59 per cent, or £228 a year, by the end of the decade to fund improvements, including the treatment of wastewater. This was rejected by the regulator, which said it could increase bills by 23 per cent over the five years to 2030.
A lower-ranking group of Thames bondholders, which hold about £1 billion of the water company’s debt, had called on the company to extend the deadline for creditors to agree to the financing deal after putting forward a rival offer. The alternative proposal would make £3 billion available in a lump sum and cost 8 per cent interest a year.
In response to the competing loan securing the necessary backing, a spokeswoman for the B class bondholders said: “Even with Thames Water having apparently reached 75 per cent support among its class A creditors for the class A proposal, this is only approval of one of the many classes that will have to ultimately vote on the plan.
“In addition, this level of support is only the bare minimum required for the court to even consider granting its approval. The court will have to carefully consider matters such as fairness and alternatives when deciding whether to approve the non-consensual plan.”
The B creditors “will continue to press for a better alternative”, the spokeswoman said.
Approval for the lifeline funding is just the first step in attempts to pull Thames Water out of crisis.
The £3 billion loan agreed with senior debtholders will need to be approved by the court, a process that is due to start next month. The agreement will also release an estimated £400 million in reserve funding that will last the company until February, when it expects the new liquidity to be unlocked.
Securing an extra £3 billion in equity and approval to increase bills is crucial to avert a cash crunch in the medium-term. Ofwat is due to deliver its final determination on 19 December and an appeal to the Competition and Markets Authority will follow if the regulator does not allow Thames to jack-up bills by the near 60 per cent that the water company has requested.
A rival offer from junior debtholders has also been put forward. The £3 billion loan proposal would come with a slightly lower interest rate of 8 per cent, but combined with fees, would still cost about 17 per cent, according to its own calculations, versus the 20 per cent for the offer already agreed in principle by Thames.
The class Bs are greatly outnumbered. They hold debt with a face value of about £1 billion, but which is trading at 10p in the pound, versus the As, which hold debt with a face value of £12 billion that is trading at about 80p in the pound.
The rival offer would need the agreement of at least 75 per cent of class A bondholders, a potential stumbling block since the new debt would rank ahead of their bonds.