Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Thames Water’s parent company has sent a formal notice to bondholders informing them that it has defaulted on its debt, firing the starting gun on a potentially messy restructuring at the owner of Britain’s largest water utility.
One of the holding companies that owns Thames Water on Friday said interest payments due earlier this week on a £400mn bond “have not been paid” as it issued a “formal notice of default”.
The bonds were sold by Kemble Water Finance, which is part of the labyrinthine corporate structure built at Thames by its former owner, Australian infrastructure investor Macquarie.
The nearly £15bn of debt held by the Thames Water utility companies that sit below Kemble should be unaffected by the default.
But it creates further uncertainty for a business that supplies a quarter of the UK’s population and has become a political flashpoint because of public anger over sewage discharges and its service record.
It also threatens to wipe out the stakes of Thames Water’s nine shareholders, which include the Chinese and Abu Dhabi sovereign wealth funds as well as Canadian and UK pension funds.
Shareholders had been due to inject another £500mn into Thames Water by the end of last month, but last week refused to do so unless regulator Ofwat approved a 56 per cent real-terms increase in customer bills by 2030 and offered concessions on dividend rules and leniency on fines.
Ofwat is due to make a draft decision in June and a final ruling early next year. Privatised by Margaret Thatcher’s government in 1989, Thames Water requires substantial investment to overhaul its ageing infrastructure.
Kemble has appointed restructuring adviser Alvarez & Marsal to aid its discussions with creditors and said it had begun approaching lenders “to request that they take no creditor action so as to provide a stable platform while all options are explored with all key stakeholders”.
The Financial Times on Thursday revealed Kemble’s creditors include two Chinese state-owned banks, part of a group of lenders that were involved in a stand-off over extending a £190mn loan due at the end of the month.
While Kemble’s creditors could theoretically look to take over the company through a debt-for-equity swap, the substantial investment required could make it an unappealing prospect for lenders. Kemble’s £400mn bonds are trading at little over 15 per cent of their face value, indicating debt investors are braced for a near-total wipeout.
Thames Water’s management has long insisted Kemble’s travails should not have an impact on the regulated utility, which they say has £2.4bn of cash and access to other overdrafts that will allow it to continue operating until 2025.
The Kemble debt is a legacy of Thames Water’s 2006 buyout by Macquarie, which has drawn scrutiny for the billions of pounds in dividends the firm siphoned off during its decade-long ownership.
Macquarie put in place a so-called “whole-business securitisation”, where the utility’s cash flows service different tiers of debt. Kemble, named after a village in the English countryside near the source of the river Thames, allowed the firm to borrow more money.
Kemble relies on dividends from Thames Water to pay interest to its bondholders and lenders.
However, new rules introduced by Ofwat last year prevent the payment of dividends from the utility if they put the company’s financial resilience at risk. Ofwat opened an investigation into a £37.5mn dividend paid by Thames Water in October last year, with a ruling expected within weeks.
Thames Water has been trying to avoid being taken over under the government’s special administration regime, which could leave taxpayers on the hook and undermine confidence in the privatised water industry.
While an insolvency at Kemble would not necessarily result in these measures being taken, a messy and protracted debt restructuring that does not provide a long-term funding solution for Thames Water could increase the likelihood of a de facto nationalisation.
Read the full article here
