Thames Water could be burdened with more than £800mn in interest and other costs on its planned £3bn emergency debt, which analysts have warned will cost customers less cash for infrastructure improvements. will be damaged.
Britain’s biggest water utility, already struggling under a £19bn debt mountain, said on Wednesday it had received approval from a majority of its creditors to take on £3bn of new debt.
The additional debt, which will require approval in the courts, is aimed at preventing the company from running out of cash shortly after Christmas and being re-nationalised under the UK government’s special administration process.
But the loan comes with a headline interest rate of 9.75 per cent and around £200mn in fees and other sweetties that could take the total cost over the loan’s 2.5-year life to more than £800mn, according to the infrastructure finance specialist. Scientific infrastructure and assets.
Tim Whittaker, research director at SIA, said that when the loan was fully taken down, annual interest costs would increase by around £300mn and “would have a significant impact on the bills of 16mn customers”.
“This will have a clear impact on customers as higher interest payments on debt will hurt Teams’ ability to invest in its business and the company’s resources will go to creditors.”
The debt is putting pressure on Prime Minister Sir Keir Starmer to take control of the company, which provides water and sewerage services to 16 million customers in London and surrounding areas.
Starmer’s Labor government, elected in July, has so far insisted it will not re-nationalise Thames Water, instead favoring a private sector solution to its problems.
Liberal Democrat MP Sarah Olney urged the government to stop the “bad deal” and recognize that the water company is finally on the verge of entering special administration, a form of restructuring.
“The deal on the table is a short-term fix that will saddle Thameswater with further debt – at the expense of the company, Thameswater’s customers and the UK taxpayer,” he said.
The group of top-ranking Teams bondholders offering the £3bn loan includes US hedge funds such as Elite Management as well as major asset managers such as M&G.
People close to the group argued that interest on the new loans would be funded by a portion of the loan itself rather than from consumer bills, a move that makes the facility larger than it otherwise would be.
They also argued that Thames is expected to write down some of its total debt in future restructurings and that the huge interest bill would lead to a haircut for creditors rather than a hit to consumers.
However, Whittaker said, “If a company has to pay a lot of interest, it reduces the ability to use the cash for other alternative uses, such as reducing sewage flows or improving the network.” Investment for”.
The debt is intended to keep Thames afloat until it can raise at least £3bn from new investors next year and further restructure its balance sheet.
Its current shareholders include pension funds Omers and USS, as well as Chinese and Abu Dhabi sovereign wealth funds. They have described the business as “non-investment-grade” and want to withdraw, taking a potential loss of £5bn.
Potential new investors await OfWatt’s decision next month on the extent to which it will allow Thames to increase customer bills before submitting final bids in January.
The company has asked Ofwat to approve a 53 per cent rise in bills by 2030. Investment bank Rothschild is running the equity raise, with final bids to be submitted by January next year.
Adam Lever, professor of accounting at the University of Sheffield’s Audit Reform Lab, said Thames was “operating on the false logic that the answer to a highly indebted company is more debt at higher interest rates”.
A separate group of lower-rated bondholders has offered an alternative £3bn loan at a lower rate of 8 per cent with significantly lower fees and different terms. They have appointed specialist legal firm Quinn Emanuel to represent their interests and may challenge the proposed loan.
Whittaker argued that the new debt to senior “Class A” bondholders would give them more control over the company and put them in line “if Thames enters special administration”.
Mike Wheeler, a former restructuring expert at KPMG, said “serious consideration should be given to putting Thames Water into special administration ahead of a potential recovery of assets, which represent infrastructure”.
“If the Class As are going to fully cover their debt and all the costs associated with it, the only people who are going to pay for it — and that’s you and me,” he added.
People close to the Class A lenders said they expect Thames to take a haircut on its original debt value in a future restructuring. Whether they make a profit overall will depend on the price at which they originally purchased the loan.
A spokesman for the lenders group said: “This is the first stage of our restructuring plan for Thames Water which aims to end a special administration and save UK taxpayers and bill payers billions in increased costs. is.”
Simon Cope, national officer of Unite the union, urged Labor to nationalize the water companies. “Until they do that, we will continue to move from one crisis to another with the continuous degradation of our supplies and waterways,” he said.
Offutt said the higher interest costs are not added directly to customer bills, as they are agreed with the regulator based on the “notional” cost of borrowing and not “the actual rates companies borrow”.
The Department for Environment, Food and Rural Affairs said: “We are monitoring the situation closely and the company is stable. The Government is working to make the sector more investable over the coming decades.”
Thames Water declined to comment.
