Thames Water Refinancing Delayed as Negotiations Continue with Creditors and Ofwat
Refinancing discussions at Thames Water are taking longer than expected and are unlikely to conclude before Christmas, with the current phase anticipated to take months.
Negotiations have been ongoing since June between creditors, specifically Class A bondholders, and the regulator Ofwat. Preparatory work for these talks began approximately six months earlier in anticipation of a potential bid from KKR.
In October, creditors proposed a refinancing plan featuring a £4bn (25%) debt write-down and a £3.15bn equity injection. However, financiers have indicated that this is insufficient to support a robust turnaround over the next decade.
There are expectations that a larger debt write-down, at least around 30%, combined with a deeper equity injection, will be necessary. Additionally, a clearer strategy to reprioritise the company's £20bn capital expenditure (capex) over the next five years is required.
Clarity on spending is crucial to distinguish day-to-day operating costs from capital investments, ensuring that customers are not charged for improvements they have already paid for.
Performance conditions remain a contentious topic: creditors are seeking leniency on regulatory fines to avoid a damaging financial feedback loop and are requesting targets related to spills and leaks. Nonetheless, Ofwat intends to retain its powers to impose fines for underperformance.
The dynamic between the government and regulator is currently tilted towards a market-led solution. Ministers are wary of scenarios involving special administration or nationalisation, which constrains how forcefully Ofwat can apply pressure.
If the restructuring proceeds, there is potential for US hedge funds, such as Elliott Management, to become the largest shareholders instead of UK pension funds.
