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Troubled UK utility Thames Water has had its credit rating slashed further into “junk” territory after it reached a tentative deal with some creditors on £3bn of emergency financing that would rank ahead of existing debt.
S&P on Monday cut the rating on Thames Water’s £16bn of top-rated debt by three notches, from CCC+ to CC, and downgraded the rating on its riskier class B debt two notches, from CCC- to C.
The rating agency said other creditors would “receive less value than promised in the original class A and class B” as a result of the proposal last week that the largest holders of some of the utility’s class A debt, including hedge fund Elliott, would provide the emergency financing.
S&P also revised its recovery expectation for class A holders in the case of a default down from 70-90 per cent to 50-70 per cent.
Thames Water said: “This downgrade does not influence the liquidity transaction extension agreed with our creditors,” adding: “We continue to work closely with them and have their support.”
Thames Water is the UK’s largest water and sewerage provider, serving 16mn households in and around London. It is struggling with a £19bn debt load and has warned that it could run out of cash by Christmas.
It is separately seeking to raise at least £3bn of equity from investors after its existing shareholders, a group of pension and sovereign wealth funds, said this year that the business was uninvestable and refused to inject more money.
The group of class A creditors are offering to provide the £3bn of debt on a “super senior” basis, putting it ahead of all existing debt in an insolvency or “special administration” — a form of nationalisation.
Thames Water said on Friday that its other class A and class B bondholders “will have the opportunity to participate” in the new super senior loan.
Under the creditors’ new proposal, which S&P referred to as a “distressed restructuring”, the interest charged would be 9.75 per cent a year, far above market rates for most loans.
Thames Water would borrow an initial £1.5bn that would last until October 2025 and a further £1.5bn would be released if regulator Ofwat did not give permission to Thames Water to increase bills by as much as it wants to.
For the deal to go ahead, Thames Water would need 75 per cent of its lenders to agree.
The new financing would also be provided with an “original issuance discount” of 3 per cent, meaning the lenders will be paid back a larger face value than they originally lent when the debt matures.
Ofwat said on Friday that the proposal was a “positive step” towards “a market-based solution to the company’s problems”.
A group of class B bondholders also separately proposed their own equivalent loan with a lower interest rate of 8 per cent on Friday.
