Thames Water closer to creditor-led takeour
The company has been in severe financial distress for almost 3 years now
Thames Water, the UK’s largest water company serving 16 million households in the south, is getting closer to a creditor-led takeover. The company has been in severe financial distress for almost 3 years now, because previous private ownership of Thames Water took on a lot of unsustainable debt.
However, since Thames Water provides a necessity the company has not been declared bankrupt so that the lenders can recover their loans - if this was done then the lenders would basically be able to hold water supply hostage.
The current deal being proposed and scrutinised by Ofwat - the UK water regulator - involves senior lenders putting billions of pounds of new money into the company in exchange for equity/ownership. This is essentially a debt-for-equity swap.
Analysis
The issue is that approving this deal would cost Thames Water around £750 million before a single infrastructure improvement is made. ~£150 million in fees would go to the senior lenders, ~£250 million in fees would go to lawyers/bankers, ~£300 million to cover loan interest, and a further £50 million owed to other creditors.
Whilst the senior lenders frame this deal as a rescue of Thames Water, since over £9 billion in debt would be written off, this is still a politically sensitive matter since almost a billion pounds is being handed over in fees alone.
What does this mean for the sector?
- How Ofwat handles this matter will determine how much regulatory authority it has over financially distressed companies of this sort in the future
- Other water companies with large amounts of debt, like Southern Water, will be watching how successful creditor-led restructurings can be
- There are prospects of a stock market listing by 2030 which signals a possible exit strategy for the senior lenders that are party to this deal
How to use this in applications
Restructuring and insolvency teams at law firms will be advising either the creditor group or Thames Water itself on the mechanics of this debt-for-equity swap, thinking about making use of intercreditor agreements to decide who gets what. There is a High Court approval required for this deal in addition to Ofwat’s regulatory review, so an advising law firm will have to navigate the UK’s scheme of arrangement framework in obtaining this approval.
As for the actual deal, finance teams at law firms will work on the debt facilities. For example, Apollo is proposing a £6.5 billion credit facility as part of the deal, so a law firm will have to advise on how to structure this in terms of covenants (telling the borrower company what they can/cannot do) and in terms of drawdown conditions (explaining when Thames Water can withdraw money from the credit facility).
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