As an independent review sets out a vision for cleaning up the water industry, a real-world example of why the sector is in such deep trouble floats into view.
The announcement that Thames Water’s preferred investor KKR will not after all be injecting £4bn for an equity stake is, first and foremost, a crisis for the debt-laden company, increasing the chances taxpayers will have to throw it a lifeline.
Yet it also encapsulates the fundamental challenges Sir Jon Cunliffe’s Independent Water Commission is trying to address.
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A regulated utility that should offer a regular, predictable, low-risk flow of water to customers and returns to investors, is instead sinking under the weight of its own debt and a failing system.
Rapacious mismanagement and misguided regulation may have allowed historic investors in Thames to make a killing, but its current shareholders have been wiped out, its creditors are facing substantial losses on £20bn of debt, and now even a private equity giant immortalised as “the barbarians at the gate” of corporate America cannot stomach a stake.
Sky News understands one factor in their decision was the political risk of investing in water, given criticism of the sector from ministers, campaigners and the media, and uncertainty over the future of regulation.
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In the short term Thames thinks it can fill the hole left by KKR by turning to its senior creditors, a group including institutional investors BlackRock and Aberdeen and hedge funds Elliott and Silver Point.
With control of around £12bn of the £16bn of regulated company debt, they are already the effective owners and have battled through the courts to retain influence in any restructuring, and with it a say in the size of their inevitable losses.
The creditors have already added a £3bn emergency loan to Thames’ liabilities, which they say will be followed by an equity stake, as well as a write down of the debt they hold as part of a refinancing.
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That could see a debt-for-equity swap, in which loans are exchanged for a share of the company. Following the KKR announcement,Thames’ bonds were trading at less than 70p in the pound.
That implies a 30% writedown for creditors, though they may have other ideas.
Whatever level is agreed, their business plan will need to convince Ofwat that it is sustainable and a 400-page proposal, including plans to replace Thames’ current chairman Sir Adrian Monatgue, is with the regulator. If it floats, a restructuring process could begin as soon as next month.
By then Sir Jon will be finalising recommendations intended to ensure that Thames’ plight cannot be repeated.
His interim findings diagnose the problems with chalk-stream clarity. Weak strategic direction from government, misdirected and muddled regulation, companies that have failed both public and private interest and investors who have lost their appetite.
Sir Jon has left the door open to the creation of a ‘super-regulator’, bringing together the responsibilities of Ofwat and the Environment Agency, to create a regime that delivers for customers, the environment, and long-term investors for whom water used to be a safe bet, but is now a poisoned chalice.
