Whilst there were concerns that a lengthy appeal could tip England’s biggest water company into a special administration, Thames Water has ultimately received what amounts to a stay of execution.
Despite an appeal by a group of Thames Water’s creditors, who argued that the company would be better off in administration, the Court of Appeal swiftly denied this request, as reported by BBC News.
This has freed Thames Water to receive a £3bn loan, adding additional debt to an already debt-laden company but also buying it at least another 12 months to negotiate, restructure and reassemble itself, assuming no other major misfortunes befall it.
What is Thames Water going to do next, and how will it affect business water rates and services?
No Additional Water Bill Increases Yet
Aside from the 35 per cent increase already agreed to by Ofwat, Thames Water had planned to appeal to the Competition and Markets Authority (CMA) alongside five more water companies to force the water authority to allow them to increase bills further.
This action, at least on the side of Thames Water, has been deferred according to Sky News, whilst they examine details of potential new investment offers, although the challenges by South East, Northumbrian, Anglian, Southern and Wessex Water are all still in place.
The argument, according to Ofwat, is that Thames could transform itself quicker following a deferral and investment than if it remained part of the CMA appeal.
This is in some respects a strategic move, given that the existing bill increases are extremely unpopular with business and residential customers alike due to the perception that they are rewarding failure.
According to data provided to the Guardian, 50 per cent more raw sewage was discharged into rivers compared to the year before, as an increasingly damaging consequence of decades of underinvestment into waterways and infrastructure.
It does not help that Thames Water initially planned to spend £1.5bn on legal fees to get this bill approved, according to Gurpreet Narwen at Sky News.
New Investment Opportunities
Despite being a monumental amount, the £3bn alongside other capital buys Thames a year to get its house in order, which it plans to do by finding an investor to rescue the company and avoid a special administration regime.
According to The Guardian, six bidders are in the running, although there are complications with many of these bids that might cause delays or a cessation in negotiations.
Many of the proposals require regulatory accommodations, which would involve lower fines and penalties for continued poor performance, something that would be somewhat difficult for Ofwat to countenance given that it would enhance claims that they are a “soft-touch” regulator.
Conversely, some of the bidders are interested in Thames Water even if it ends up falling into special administration.
It could also potentially include bill increases, although the exact details of any rescue package are unlikely to be known before June.
Beyond this, creditors are expected to take significant write-downs on any debt, and this “haircut” was a significant reason for the High Court battle over the loan financing proposal in the first place.
The hope of Thames Water is to have a deal in place by September, although it warned that there was no certainty of that.
Dodging A Doom Spiral
The final goal of Thames Water in this current intermediate period is to avoid ending up in a doom spiral of debt that could make a special administration inevitable regardless of the attempts made to stop it.
Part of the concerns raised with this additional investment is that because the loan was provided at an interest rate of 9.75 per cent, far more needs to be paid back and Thames Water has added even more layers of debt to avoid insolvency.
This money will come out of bills paid by Thames Water’s 16 million customers, and the uproar surrounding increases to bills (and especially increases to these increases) is as much about where this money will go as the actual amount.
Whilst not an easy sell, if there were assurances that increased bills would result in a better service, improved infrastructure and less destruction to British areas of outstanding natural beauty, it is possible that the loud outcry concerning bill increases would be reduced to more of a grumble.
Instead, the money is to be spent primarily on servicing debt, and if it does not work and a turnaround is impossible, a future special administration could be even more expensive for taxpayers and have a larger effect on the wider water market.
