Lenders toThames Waterhave said they will provide £5bn in funding to the struggling utility, in an emergency turnaround plan that has quickly raised concerns from the water regulator, Ofwat, over potentially inadequate losses for debt holders.
The group of existing senior creditors to Thames Water, a band of more than 100 financial institutions, said their plan would inject £3bn of equity and another £2.25bn of debt.
However, they said their plan would reduce total debt levels at Thames, which is struggling under about £20bn of debt. In total, lenders would write off about £6.7bn of their loans to Thames and its parent company in an effort to reduce the huge load and in preparation for an eventual stock market listing.
Creditors admitted their plan hinges on a considerable leniency from Ofwat, the government’s water regulator for England and Wales, over future fines for environmental failings.
The creditors have requested that Ofwat set Thames Water lower environmental standards – and even for it to let the water company off without fines for past breaches of its licences and permits.
The creditors will argue to Ofwat that the much-criticised leniency is necessary to avoid a “doom loop” of fines preventing recovery. The Guardian previously revealed that creditors are hoping forimmunity for directors from prosecution for environmental crimes.
Thames Water has been on the verge of financial collapse for several years, afterdecades of underinvestment and dividend extractionleft it with leaking pipes and treatment works falling apart, even as its debt mountain grew.
The company has desperately been seeking a way out of the turmoil without the government being forced to take control under a special administration regime (SAR), essentially temporary nationalisation.
The government is also opposed to stepping in unless there is a direct threat to water and sewerage services for 16 million customers in London and south-east England.
The creditors were forced to step forward with a rescue plan after the preferred bidder,the US private equity firm KKR, pulled out last week in a shock announcement. KKR is thought to havebalked at the complexity of taking on Thames Water amid intense political scrutiny.
KKR’s withdrawal will mean long-term control of Thames Water will sit with the group of about 100 creditors, ranging from big institutional investors such as Aberdeen, BlackRock, Invesco and M&G, to US hedge funds – such as Elliott Investment Management and Silver Point Capital.
It is widely acknowledged that creditors will have to write off a significant portion of existing debts to allow Thames to recover.
It is understood that the controlling senior creditors will write off £3.2bn from about £16bn of debt, with other lenders forced to write off about £3.5bn.
Senior sources at Ofwat told the Guardian there was concern over some of the terms of the creditor proposal, including whether it was possible for Thames Water to return to an investment-grade credit rating without controlling creditors writing off 30% to 40% of their debt – versus about 20% in their initial proposal.
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One person said there was a “reality gap” between the creditor proposal and what the regulator thought would be necessary.
A spokesperson for the creditors said they would build a new Thames Water.
“The creditors’ turnaround plan is designed to fix the root causes of Thames Water’s problems, restore its balance sheet, rebuild customer trust and provide the financial investment and operational capabilities to fix the fundamentals of the business once and for all,” the spokesperson said.
“The plan seeks to break from the patterns of the past by delivering customers’ priorities and improved outcomes for the environment in the shortest possible timeframe.”
An Ofwat spokesperson said it wanted Thames Water to “deliver a turnaround in its operational performance and strengthen its financial resilience to the benefit of customers”.
“We have commenced a thorough review of the submission from the group of senior creditors. Our focus is on assessing whether the plans are realistic, deliverable and will bring substantial benefits for customers and the environment.”