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