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How long will Thames Water continue to sit in a fetid pool of stagnant water? Britain’s largest privatised water utility has been in breach of its licence for a week now, after Moody’s slashed its credit rating to “junk”. Thames needs two investment-grade ratings to comply with its licence conditions: S&P yesterday added to the stink by following suit.
This is a moment, even if Thames won’t collapse into public ownership immediately. Until recently, the possibility of a company like Thames — which receives a regulated, predictable income — being junked was unthinkable, says Tim Short, a former banker who specialised in the “whole business securitisation” financing that underpins infrastructure investments in the UK.
This is another step towards Thames’s eventual, necessary restructuring. Hypothetically it may still be able to avoid “temporary nationalisation” but the odds are narrowing by the day.
For a start, Ofwat must act quickly if it is to retain any shred of credibility. The regulator is expected to bring forward special measures that form part of a new, intensive “turnaround oversight regime” for failing water companies.
This is weak sauce. Initially, it will involve appointing a trustee at Thames to assess whether management is doing the right things to turn around the company and make sure vital works aren’t cut to save cash.
The reality is that a single trustee with limited powers is unlikely to effect much change, especially in a short space of time. Thames sits on a burning platform: the regulated company has gross debts of £16.5bn and only has sufficient liquidity to last until May.
The fate of the UK’s biggest water company still relies on attracting new equity — an outcome that sits somewhere between highly problematic and rather laughable. It needs £750mn by April and £2.5bn by the end of 2030. Existing shareholders have preferred to take hefty writedowns rather than throw any more cash into this sewer.
A draft regulatory settlement published last month — which will determine how much investors in English water companies can make in the five years from April — proposes a return on equity of 4.8 per cent. Thames thinks it needs a return on equity closer to 5.7 per cent to attract new investment.
The regulator’s great hope appears to be that Thames will manage to restructure its mountain of debts. This would mean a much cleaner proposition for new equity investors.
Good luck with that: it is a process that would probably involve a protracted tussle with lenders and is something that ultimately might be more easily handled by a government-appointed special administrator.
nathalie.thomas@ft.com
