Analysis: can a survival compromise save Thames from SAR after KKR quits?

KKR has withdrawn from buying Thames Water. Ofwat’s recent partial clarity on fines and remedial work, much of which will be funded by shareholders, appears to have been the final nail in the coffin of KKR’s assessment of Thames’ uncertain financial future.

In addition to the £105.4m fine announced by Ofwat, (a penalty of 9.0% of Thames Water’s wastewater business turnover for 2023-24), the required remedial work at 157 of Thames’ sewage treatment works and 240 storm overflows remains financially and operationally challenging. This adds to the £18.2m fine and a £131.3m revenue reduction adjustment for historic dividend payments. In addition, there is a possibility of additional fines being imposed by the Environment Agency. With no prospect of regulatory relief, KKR has thrown in the towel.

The senior creditors are now seeking another route to avoid Thames entering the Special Administration Regime. The group is taking advice from Mike McTighe, chairman of a number of companies including Openreach and IG Group. By taking matters into their own hands, the creditors may be signing up for substantial debt to equity swaps, but also could have found a new chairman to lead them forward in McTighe. Other first round bidders such as Castle Water may be invited back to the discussions.

Having paused its plan to remunerate its senior management, Thames will have to take into account Ofwat’s newly-granted powers to ban bonuses which came into force on 6 June. Thames has already fallen foul of a number of criteria for paying bonuses in the legislation, including lack of financial resilience; breaches in its statutory duties; and a number of category 1 pollution incidents in 2024.

Fines, negative revenue adjustments and clarity on the lack of bonuses are now all on the table. Will politicians cut Thames some slack?  McTighe, having been on the board of Ofcom, may be well placed to negotiate with government. The unpalatable alternative for The Treasury is for the public sector to take on the responsibility for Thames’ substantial financial liabilities. A survival compromise is needed.