Thames Water is sinking – should the Government throw a lifebuoy?

Distressed utilities provider Thames Water is facing mounting pressure as it rapidly runs through cash, and fights to stave off insolvency and renationalisation. The company is struggling under debt that amounts to 80 percent of its value, making it the most heavily indebted water company in England and Wales.

In the last few days, Thames Water has received approval from over three-quarters of its lenders to take out a new £3bn emergency loan. It is, however, debatable whether more debt will ultimately solve the company’s problems, since having too much debt is the fundamental issue plaguing the troubled company. Thames Water’s chief executive Chris Watson concedes that even the £3 billion loan is not a solution per se, but merely a means to buy time to attempt to find a long term solution, saying that he hopes it may put the company "onto a more stable financial footing as we seek a long-term solution to our financial resilience". 

The terms of Thames Water’s current debt have indeed been a major part of the problem. Even as it veered towards insolvency this year, it remained legally obliged to make substantial debt interest payments, albeit dressed up as dividend payments.

Despite the dire straits Thames Water now finds itself in, the company’s own shareholders are refusing to throw it a lifeline, as they say the company is simply uninvestable. The company is facing a perfect storm of previous scandals, coupled with declining credit ratings, a growing regulatory burden, heavy regulatory fines, and the looming threat of significant litigation. These factors have combined to deter most investors, who have steered clear of a company facing insolvency and potentially wider PR nightmares.

Yet, in recent weeks, reports have emerged that parties (including Castle Water) may be interested in taking a stake in the utilities providers. However, such interest appears to be contingent on the company’s current investors agreeing a significant write down on debts owed to them, and clarity as to by how much future water bill changes may be increased. The BBC has nonetheless reported that up to six parties could be interested in investing in the company – provided that significant debt write downs can be agreed.

Thames Water’s debt problem goes back to when Macquarie owned the company, with the company’s debt burden topping £10 billion when it was sold on in 2017. Its debt is expected to top a remarkable £17.9 billion by March of next year, which shows the unfortunate trajectory the company is on.

Macquarie argues that, during its ownership of Thames Water, it invested billions in water and sewage infrastructure which resulted in the increased debt, but others suggest that Macquarie took billions from Thames Water in loans and dividends.

While Thames Water has not paid dividends to external shareholders since 2017,  it has paid over £200 million in dividends to other group companies in recent years - often in respect of loans. To make matters worse, these debt repayments are linked to inflation, which has reached historic highs in recent years.

Lenders are also understandably becoming increasingly concerned that their loans could be wiped out in the event of insolvency and nationalisation.

It remains to be seen how the Thames Water saga will play out. If private sector investment cannot be secured, then the UK government’s proposed £5bn lifebuoy may come into play - at a considerable cost to UK taxpayers who may be left carrying the can as Thames Water faces a lengthy battle to restructure its finances - and potentially reputationally damaging litigation and fines.

The efficiencies and strategy which the private sector can bring to the utility industry is critical where investment and strong management are needed. However, Thames Water seems to be a bell weather company that encapsulates a growing problems with the delivery of public services, where regulators have not grasped the nettle and enforced standards. The strain of delivering services can be seen across the private and public sector and, oftentimes, the taxpayer will end up picking up the bill when the private sector fails.

The slow and grinding collapse of Thames Water is emblematic of the strain facing both private and public sector businesses in the UK and, while there is some hope that a deal may yet be hammered out amongst private investors, nationalisation remains on the table an extreme but entirely plausible outcome.

How the UK government and its regulatory bodies handle this crisis will prove crucial in demonstrating the long term sustainability of not only Thames Water, but the sector as a whole.