Red flags were there for Thames investors, researchers say
Red flags would have been apparent to investors in Thames Water, had its key characteristics been benchmarked against market and peer group data.
That’s according to asset pricing and credit risk research specialist, the EDHEC Infrastructure & Private Assets Research Institute. In a new report, Low tide – benchmarking risks in infrastructure investments: what the data showed about Thames Water, EDHEC suggested using a comparable set of data – on what a typical company with the same characteristics as Thames Water in terms of risk factor exposure, duration and likelihood of dividend payouts – would have revealed the firm was likely to have lost between 30% and 50% of its value over the past decade.
EDHEC identified three red flags:
“Red flag #1: The company should have been expected to take on too much risk as it faced ‘twisted’ incentives in the shape of an extremely low weighted average cost of capital imposed by the regulator.
“Red flag #2: The company created not only a structure to extract a lot of cash but also a huge debt pile – it should have been clear from 2016 onwards that there will be no payout for many years.
“Red flag #3: Thames Water’s exposure to key risk factors was always high compared to its peers and increased over time: this implied a much higher discount rate and lower value than what was reported until the company’s value was brutally reduced by 30% last year [2022].”
The researchers pointed to a £1.5bn loss for investors in December 2022 when “only nine months earlier, in March 2022, some investors were still increasing the valuations, but for such a large water utility to lose so much value so fast, the investment must in fact have been mispriced for several years.”
Reports last week suggested that a fund controlled by USS, which has a c20% stake in Thames parent Kemble, had lost just shy of £600m in value after it wrote down investment from £956m in 2022 to £364m last year.
In an update published last week, USS said: “The challenges facing Thames Water are the manifestation of historic under-investment over multiple decades and, more recently, the significant financial impact of soaring energy prices and other inflationary cost pressures. However, we have given our backing to Thames Water’s latest business plan.
“As a long-term investor, we can provide patient capital and be an active, responsible steward of the company. While the value we place on our Thames investment may go up or down as part of our regular revaluations, we continue to view this as a long-term investment, in line with the long-term needs of the scheme. That is why we were willing to commit additional funds to the business in March 2023 and have shown willingness to commit more in the future…We remain of the view that, with an appropriate regulatory environment, the long-term objective of repairing important UK infrastructure and paying pensions to our members are in strong alignment.”
Kemble’s largest shareholder, OMERS, wrote down the value of its holding last year.
Thames’ new chief executive, Chris Weston, starts at the company today.
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