Thames Water has alerted a group of bondholders that their actions could push the UK’s largest water company into default and potentially lead to temporary nationalization if they attempt to disrupt the utility’s plan for an emergency £3 billion loan.
The beleaguered utility has issued a strong warning to its junior bondholders, stating that their intention to propose an alternative loan in court next week could trigger an “event of default” across Thames Water’s £19 billion debt portfolio.
Such a default would constrain Thames Water’s ability to invest in infrastructure upgrades and could result in breaches of environmental regulations, the company warned.
According to a letter dated December 9 from Thames Water’s lawyers at Linklaters, the utility’s board might “no longer be prepared to accept the legal, regulatory and environmental risks and enter into discussions with Ofwat and Defra as to the entry into special administration” if a default occurs.
The government’s special administration regime serves as a form of temporary nationalization. There is increasing pressure for Thames Water to enter this regime, allowing the company to focus on improving water and sewerage infrastructure and restructuring, rather than negotiating with creditors.
In the letter, Thames Water emphasized that the junior bondholders’ proposed actions posed “imminent and irreversible jeopardy,” highlighting the “grave consequences” a default would have on both the company and its creditors.
Thames Water communicated to the Financial Times that it seeks cooperation from all creditors, assuring that there would be no risk to services during negotiations or even if the company were to enter special administration.
This intervention follows Thames Water’s management agreement to accept a loan of up to £3 billion from top-ranking bondholders in an effort to avoid renationalization.
Serving 16 million customers in London and surrounding areas, Thames Water is grappling with substantial debt and has warned that without the loan, it could deplete its cash reserves by March.
The company is incurring millions in advisory, legal, and consultancy fees but hopes the loan will provide the necessary time to secure new equity investors next year.
However, a group of rival bondholders holding lower-ranking debt oppose the deal, which carries a 9.75% interest rate and could cost the company up to £800 million if fully utilized over the next 2.5 years.
These rival bondholders have proposed a more affordable loan and plan to present their case in a preliminary court hearing on Tuesday, initiating the official approval process for the loan.
Both proposed loans would take precedence over Thames Water’s existing bonds. The rival creditor groups aim to protect themselves from losses in any debt restructuring, as junior or class B bondholders would face greater losses in the event of insolvency.
A source close to the class B bondholders accused Thames Water of “playing an elaborate game of chicken where they threaten us with special administration.”
Another insider mentioned that class B bondholders disagree with Thames Water’s assessment, arguing that any “restructuring plan” might trigger a default at some point but is generally manageable through various legal strategies.
While the proposed class B loan would be less expensive for the company, Thames Water contends that implementing it would be challenging due to likely opposition from senior class A creditors. Additionally, Thames Water noted in its letter that the class A plan has already secured waivers from its creditors to prevent default, but these could “lapse” if the deal is overturned.
The loan arrangement with class A bondholders also includes a new set of “retention” incentives for Thames Water’s management team on “terms acceptable” to the creditors, intended to ensure management continuity, though details are yet to be finalized.
On Friday, Thames Water announced that it expects a group of lenders who provided interest rate swaps to support their court plan after the company proposed modifications to benefit them.
In its statement to the Financial Times, Thames Water asserted that it has a “robust plan that will be tested in court” and remains “confident of delivery.”
“The board and leadership team remain focused on turning around the business and continue to believe a market-led solution is the best financial and operational outcome for customers, the environment, UK taxpayers, and the UK economy.”
