Standing on a rapidly deteriorating platform is precarious, a situation Thames Water finds itself in, having recently announced it could deplete its cash reserves by the end of December. Just over two months earlier, it had projected sufficient liquidity to last until the following May.
Why has the debt-laden utility, which is struggling to fend off renationalisation, lost five months of liquidity?
The straightforward answer is that Thames Water is depleting its cash reserves more quickly than anticipated since July, casting doubts on its management’s reliability. Some escalating costs, such as stricter terms demanded by suppliers, are beyond their control.
However, other foreseeable issues, like the need to bolster reserves as per its complex financial agreements, have been overlooked. This situation is far from ideal, especially when attempting to secure £3.25 billion from new investors for a turnaround.
Thames Water, however, prefers to claim that it technically still possesses liquidity until May 2025. This is contingent on gaining the majority of creditors’ approval to tap into £380 million of emergency cash from reserves and access to £420 million of undrawn facilities.
Without these, it faces running out of cash by year-end, leading to a potential default or “standstill.” Additionally, it could access another £550 million in liquidity reserve facilities if allowed, though this would limit its capital expenditures to only essential maintenance.
This scenario seriously strains the credibility of the utility’s stability, a concern echoed by credit rating agencies. Both Moody’s and S&P have downgraded Thames Water’s credit ratings further into junk status, with S&P also lowering its assessment of Thames Water’s management and governance from “moderately negative” to “negative,” highlighting significant governance issues. (Thames Water maintains that it has been “very clear” about its liquidity depending on both cash and undrawn facilities.)
Thames Water’s ability to avoid temporary renationalization hinges on securing new equity investors or possibly relying on its creditors. Currently, a group of 90 creditors who hold £9 billion of Thames Water’s debt are considering an interim lending facility that could support Britain’s largest privatized water utility during this critical period.
The likelihood of proceeding with creditor support seems the most feasible. This approach would likely satisfy the regulator, Ofwat, which is advocating for a restructuring agreement among creditors to facilitate easier equity fundraising.
However, it remains uncertain why creditors would agree to provide interim financing without assurance that the upcoming regulatory settlement, setting allowable returns for the next five years starting in April, will be attractive enough to lure new investors.
The final decision on the regulatory settlement is scheduled for release on December 19, though it might extend into January. With the rapid depletion of its cash reserves, Thames Water’s prospects of staving off renationalization are dwindling quickly.
