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Thames Water’s board is split over two competing deals from its lenders aimed at saving the UK’s biggest water supplier from going insolvent.
Two classes of creditors, group A bondholders and group B bondholders, are offering high-interest £3bn rescue packages intended as a liquidity lifeline while the company burns through cash and seeks to restructure its debts.
Thames is labouring under an unsustainable £15bn debt burden after years of paying hefty dividends as well as fines for pollution scandals. Its shareholders, which include the UK academics’ pension fund and international investors from China, Canada and Abu Dhabi, have labelled the company “uninvestible” and refused to put in more money.
That has left Thames heading for a painful restructuring deal that is expected to wipe out shareholders and see its lenders seize the company – or it be forced into temporary state ownership.
The choice of debt deal is crucial as it could feed into the terms by which new equity investors sign up to take on Thames. The successful group would ultimately have a greater say over who takes control of the water company that serves 16 million customers in London and the Thames valley.
Group A represents £12bn of Thames’ debt, v a much smaller junior debt pile held by group B. Group A includes controversial US hedge funds Elliott Partners and Silver Point, as well as some well-known UK fund managers such as M&G group, and wants to charge Thames annual interest of 9.75% – plus relatively high fees, particularly if the debt is repaid early. Group B lenders would charge interest at a lower rate of 8% with significantly lower fees and different conditions. Both camps insist on having “super senior” status – ranking above the A bonds in the event of a default.
While Thames’s chairman, Sir Adrian Montague, has already said it intends to proceed with the group A deal, its board was split on Friday over which deal is best after the group B offer emerged last week, people familiar with their thinking said. It is understood that a committee of the board at Thames – rather than a full board meeting – was convened to debate their merits.
“We have a very clear duty to consider not just survival but sustainability of finances. I’m not convinced the right emphasis has been put on that by some on the board. That includes the chairman,” one person close to the deliberations said.
“The group A offer was sought as an emergency measure. But, like most emergency measures, it comes with major downsides. If there’s an offer which can leverage more investment in the long term, that’s serious,” the same person added.
Some board members have argued that the A deal offers the “clearest path” to raising fresh equity under a short time frame with consent of creditors, the people said.
Others have argued that B lenders are offering much better terms for lifeline funding. They also argue that group A’s proposal is aimed at “making the likes of Elliott kingmakers if not king” more than it is intended to secure the company’s future, the same people added.
A source close to the group A proposal said: “The facility that Thames Water announced to the market followed weeks of constructive and intensive negotiations with the company and will be financed by a broad range of creditors including pension funds, insurance funds and banks who lend across the UK infrastructure sectors.”
They added that the group A proposal also allows Thames to draw on emergency reserves stabilising the company while court processes take place to allow the deal to progress.
If both deals were to fail, Thames could fall into a form of temporary re-nationalisation known as a special administration regime.