Thames Creditors Plan £5 Billion in Fresh Funds, Debt Writedowns

(Bloomberg) — Thames Water’s senior creditors have submitted a rescue plan to the UK’s water industry regulator, envisaging £5 billion ($6.8 billion) of fresh funds and hefty losses for the struggling utility’s debt holders.

The proposal includes £3 billion in new equity and £2 billion of fresh debt, according to a statement by the group of creditors released on Tuesday. It would also mean “several billion of debt writedowns” to ensure financial stability, while existing shareholders would be completely wiped out, they said.

It’s the latest twist in a long-running crisis for Britain’s largest water and sewage utility, weighed down by nearly £20 billion of debt, after preferred bidder KKR & Co. walked away from a rescue last week. Regulator Ofwat is set to discuss the plan in coming weeks with the creditor group, including Elliott Management, Silver Point Capital and Aberdeen Group Plc.

“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,” a spokesperson for the group said in the statement.

Between the new funds and the debt haircut, Thames would get over £10 billion from this plan, as reported by Bloomberg News on Friday. The fresh money would come in the form of both debt and equity to reflect the different types of investors forming the creditor group, said people with knowledge of the matter, who spoke on the condition of anonymity.

The company confirmed last week it’s working with senior creditors to restore its finances. Should the process fail, Thames could fall into a special administration regime, a temporary state-supervised process akin to insolvency for bankrupt businesses that provide critical services. That makes it a potential millstone around the neck of Keir Starmer’s Labour government.

Existing shareholders walked away last year after declaring the business “uninvestible,” leaving the creditors as effective economic owners. They also include Pacific Investment Management Company and Apollo Global Management.

The utility, which supplies about a quarter of the UK population, is now in a race to fix its finances as it eats into an emergency loan from the senior creditors.

The changes to its capital structure are focused on reducing gearing — a metric used by Ofwat to measure how much debt companies have as a proportion of their regulated capital base — to below 60%. That would be down from the current 88%, to a level in line with the regulator’s targets.

The aim is to help Thames regain an investment-grade credit rating so it can start borrowing again, with a public listing “possible in the future,” the creditors said.

On top of changes to the capital structure, the creditors have also outlined a turnaround plan for Thames’ operations. That includes a new board. For now, they have appointed Mike McTighe, with experience in turnarounds and managing regulated companies, as their senior adviser.

Their plan envisages customer bills not rising any further through to March 2030, the end of the current five-year regulatory period. The company previously asked Britain’s Competition and Markets Authority to examine Ofwat’s decision on how much they can charge customers, but has since asked it to postpone any ruling.

The creditors said they are aiming for £20.5 billion of operational expenditure in the next five years — in line with Thames’ allowance for the period. 

The proposal also has a focus on improving Thames’ environmental score. There would be a multi-year program of cleaning up rivers across London and the Thames Valley. That follows the UK’s move last week to ban six water companies, including Thames, from paying bonuses to senior executives to try to force them to do more to tackle pollution.

It includes greater investment to reduce pollution, flooding and to address broken pipes and leaks. The new owners would also direct resources to improving customer service, according to the statement.

More stories like this are available on bloomberg.com