Special Administration Regime revamp triggers water finance speculation

Speculation mounted last week regarding possible signals about water company finances – with eyes most prominently on Thames Water – as it emerged that the government is making alterations to the Special Administration Regime (SAR) for water companies.

According to law firm, Kirkland and Ellis, the suite of changes "reflect the government’s detailed practical preparations and contingency planning for the possibility that the water special administration regime may soon be used in practice for the first time”.

Currently, the SAR can be brought into play if a water company is either insolvent or has breached its licence conditions so badly that it becomes “inappropriate for the company to continue to hold its appointment”.

Key changes set to be introduced

• Enabling "hive-down" – so special administrators can transfer the regulated company to a wholly owned subsidiary and then sell the shares in the subsidiary. Kirkland and Ellis explained: “Under the previous legislation, only a direct sale of assets would be possible. The new hive-down structure is intended to maximise value on sale (by ringfencing value and enabling potential tax savings, thereby attracting buyers); it is also in line with other special administration regimes in other sectors.” Debt issued higher up the corporate group could potentially be stranded.

• If the regime is triggered by insolvency, the special administrators should prioritise rescuing the company as a going concern if possible. According to Kirkland and Ellis: “This allows otherwise-viable water companies to enter special administration, restructure their debts and then exit special administration as a going concern. (Before these changes, special administrators could only transfer the regulated business to a new owner and the old water company would then exit to liquidation or dissolution.)”

• Applying the Insolvency Act 1986 to the SAR – but with alterations including granting priority right of repayment to the public purse for any sums paid out during special administration, and setting a higher bar than is standard should any creditors or shareholders want to challenge the special administrator’s conduct.

• Introducing yet-to-come insolvency rules for the sector under the auspices of the Water Industry (Special Administration) Regulations 2024.

In a blog, director of Tax Research, Richard Murphy, stated: “The Tories are changing the law on water companies so that even if they fail the shareholders do not take a hit.” He said the changes suggest that “everyone who deals with water companies, but those who mismanaged them, will suffer. And that is all to ensure…that the government does not have to take management of these companies but can leave them with the existing shareholders who have totally failed this country.”

• According to Bloomberg analysis last week, Thames Water is “seeking more time to regain its financial footing” by reshuffling its debt through a buy back move on notes due in 2025 and £750m of new issuance.