One way or another, the long-running saga at the centre of Britain’s largest water company is reaching its conclusion, and what comes next could have consequences for not only the tens of millions of customers Thames Water service, but also business water suppliers up and down the country.
The reports of a £10bn “best and final” bid by the Financial Times, made by a consortium of senior creditors at Thames Water, have led to renewed hope that a “market-led” solution to Thames Water’s woes can be planned out.
The situation is complex, however; there are multiple negotiation impasses between the consortium, regulatory bodies and the government, and could still require compromises that neither side is willing to accept.
What is this current deal? Why has Thames Water been in so much trouble? What happens next if the deal is accepted? And what happens if it is not?
What Is The Best And Final Offer From Thames Water’s Creditors?
Thames Water has struggled to raise capital for multiple years, and following the withdrawal of an offer from KKR, the de facto owners of Thames Water were its creditors, led by a consortium known as London & Valley Water.
The plan is worth a total of £10bn, which is divided into:
- £3.35bn in equity to provide a cash injection to the company.
- £6.55bn in lower-cost long-term debt.
The latter offer is important because the UK utilities sector as a whole has increasingly struggled to access loans. Assured Guaranty, which was the biggest supplier of financial guarantees for the UK water sector, has refused to back financing efforts.
To get around this, lenders have committed to allowing Thames Water to access its own long-term debt and borrow cheaper than they otherwise would be able to.
As well as this, creditors would take a writedown on existing debt known as a “haircut”. The Class A “priority” creditors would write off 30 per cent of their existing debt in exchange for effective ownership, whilst Class B debt would be written off in full.
There are also restrictions on dividends and a provision that stops certain creditors from selling off major parts of their share in the company until 2030.
Will This New Offer For Thames Water Be Accepted?
This revised offer is not binding, nor has it been accepted by Ofwat or the UK government, but it has been described as the “best and final” offer, and includes some concessions compared to their last offer.
However, there are still negotiations to be had regarding environmental performance, fines and targets, with L&VW having argued repeatedly that Ofwat needs to provide a grace period without fines to allow for this cash and debt injection to be used to pay for infrastructure.
Conversely, this could lead to a perverse incentive where struggling water companies are being rewarded for failing their customers through increased bills, poorer environmental service and lower fines, with the promise that this money would trickle down into new infrastructure.
This would be particularly unpopular, and with the water sector a major part of the government’s agenda, anything that looked like a capitulation would be politically damaging.
What Happens If The Deal Is Accepted?
Debates remain ongoing, but an agreement would require ratification by the courts before the current emergency financing, agreed to last year, runs out.
It is likely that other concessions would need to be made to reassure the general public that this will not lead to the same types of soft-touch regulation that caused Thames Water to end up nearly £20bn in debt.
Without these concessions, other water companies could engage in very similar short-termist policies which prioritise maximising profit at the expense of the company itself, safe in the knowledge that the losses will be shouldered by customers and the British taxpayer.
Thames Water have noted that there is “no certainty” that the rescue plan will be accepted, either as it currently stands or with further amendments.
What Happens If The Thames Water Deal Is Not Accepted?
The biggest bargaining chip L&VW has is that they are essentially the only “market-led solution” left, which allows them to argue that the UK government and Ofwat’s rejection of the deal means that they chose to place it in a special administrative regime.
This process has been compared to nationalisation, with costs that have been heavily disputed, but it would involve the government taking temporary ownership of Thames Water, reorganising it and helping to clear it of debt before selling it off again.
It has only been undertaken once, to rescue Bulb Energy in 2021 during the global energy crisis, and the government ultimately made money on its eventual sale to competitor Octopus Energy.
It remains to be seen what happens if a water company collapses, but there is a risk that one domino falling could affect the rest of the market.
