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Thames Water's owners will begin urgent restructuring talks in the coming days, with parent company Kemble risking entering bankruptcy within weeks unless lenders approve a debt-for-equity deal, according to people familiar with the matter.
Restructuring experts Alvarez & Marsal will discuss all options with creditors, including bank lenders and bondholders, as the government tries to avoid a temporary renationalization of the UK's largest water utility.
The future of beleaguered Thames Water has become a sharp political headache for Prime Minister Rishi Sunak, who risks a crisis at the company brewing before a general election expected this year.
Thames Water has a complex seven-tier group structure between the parent company and the operating company, which is regulated by Ofwat and collects customer bill payments.
The group as a whole is saddled with at least £18.3bn of debt, which has become increasingly expensive to service due to the sharp rise in interest rates since late 2021.
A £190m loan at Kemble is due to be repaid by the end of April.
Thames Water said the operator had £2.4bn of “cash and committed facilities available” and could continue operating for at least another 15 months even if parent company Kemble goes into administration.
Thames Water shareholders said on Thursday they had run out of patience with regulator Ofwat, and were not prepared to invest new money, even if it meant an estimated £5bn write-down.
The nine shareholders, which include Chinese and Abu Dhabi sovereign wealth funds, as well as Canadian and British pension funds, insist Ofwat's regulatory status makes the company “uninvestable”. Two of the largest shareholders – pension funds OMERS and USS – have already taken significant write-downs on asset values.
“We need to make sure the sector attracts investment and is fair to bill payers,” Offwat said this week.
Three directors of Thames Water Group entities have resigned in recent days, which is “a sign that restructuring is on the way,” said Adam Lever, a professor at the University of Sheffield’s Audit Reform Lab.
He added: “This will be a messy and protracted series of negotiations, and it is unclear how quickly the situation will be resolved.”
Thames Water has asked Ofwat to agree to a 56 per cent real rise in billings by 2030, as well as relaxation of dividend rules and fines for pollution and other service failures.
Offwat, a company independent of the government, has refused to budge after a year of discussions, Kimble shareholders said on Thursday.
As a result, they decided not to inject an initial down payment of £500 million, which they had previously conditionally pledged by the end of March, let alone the full £3.25 billion required by 2030.
Even this was the minimum amount of cash required given the amount of investment required in the company, people close to the investors said.
Ofwat is due to make its draft decision in June, with a final agreement reached in December. Such a fluid regulatory situation will make finding new investors more difficult.
Thames Water, which needs billions of pounds of investment to replace aging infrastructure, is already struggling to keep up with maintenance. It faces public anger over sewage.
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Oxford University rowers on Saturday criticized sanitation levels in the River Thames after members taking part in the annual Oxford-Cambridge Boat Race were left in good health. High levels of E. coli were found in the river.
A third of Thames Water's wastewater monitors are not working properly, according to a new analysis of Environment Agency data by the Liberal Democrats, compared to 15 per cent of monitors across the industry.
The price of bonds issued by Kimball fell to just 15 per cent of face value on Thursday, as debt investors rushed to sell amid speculation Thames Water could be renationalised.
Kimball and Thames Water declined to comment.
