Kemble defaults and asks lenders for more time

Kemble Water has asked its lenders not to take action, after it defaulted on an interest payment due last week. This was to allow time for the firm to explore its financing options.

The likely prospect of default, and of not being able to repay a £190m loan due at the end of April, was flagged by Kemble just before Easter when Thames Water shareholders announced they would not put in the £500m of equity they had previously conditionally pledged. Kemble is solely funded by dividends from Thames, and some of the hoped-for shareholder capital would have been used to pay Kemble interest and debt.

The picture is further complicated by the fact that Ofwat is scrutinising whether a 2023 dividend payment of £37.5m from Thames to Kemble breaches recently introduced licence requirements.

The creditors, reported to include Chinese banks among others, are considered likely to allow Kemble to alter and extend the £190m loan. Another option would be a debt for equity swap. Ratings agency Fitch reportedly signalled that even if an extension is granted, the deal may constitute a distressed debt exchange, making a further downgrade likely.

Along with affecting wider water share prices, news of the default has fanned the flames of speculation about Thames’ future further. Special administration (SAR) as an option seems to be gaining ground. It was once again advocated last week by Professor Sir Dieter Helm, who made a case against “kicking the Thames can down the river”. Meanwhile ratings agency Morningstar DBRS noted: “If Kemble Water defaults on its £190m debt obligation in April, investor sentiment in the UK water sector could turn negative and sector funding costs could rise…On the other hand, in the event Thames Water is placed under an SAR, we do not believe financial contagion will spread to the other UK water utilities.” 

Amidst all of this last week, Thames Water Utilities issued £27m of shares, which ran through group companies including Kemble Water Finance. A Thames spokesman said this was “standard share issuance as part of our usual business practices within the group”.