Thames’ £3bn emergency funding plan sparks S&P downgrade and a competing offer

Thames Water had its credit rating cut further last Monday by S&P after proposals for £3bn of emergency funding were set out by a group of its creditors.

Because this funding would rank ahead of other creditors in the case of insolvency or administration (super senior debt), S&P has cut the rating on Thames Water’s existing £16bn of A-rated debt by three notches, from CCC+ to CC, and downgraded the rating on its class B debt by two notches, from CCC- to C. S&P explained that it had “removed the one-notch uplift for structural enhancement to the class A debt, reflecting the company's intent to access reserved cash and our view that the structural enhancement no longer reduces the risk of default for these creditors.”

S&P also revised its recovery expectation for class A holders in the case of a default, down from 70-90% to 50-70%. S&P’s negative outlook reflected its view that, “if the proposed transaction that we characterise as distressed debt restructuring were to occur, we would lower the ratings to ‘D'."

In contrast, Ofwat said the proposal is a “positive step” towards “a market-based solution to the company’s problems”.

In a separate development, a group of class B bondholders proposed an alternative emergency loan package, with an interest rate of 8% which is lower than the 9.75% proposed in the initial lenders’ plan. They claimed this would cost £375m less over 12 months than the original offer, and that it would have both a lower issue discount and lower fees for early repayment.

According to press reports, the class A debtors’ proposals also incorporate a management incentive plan aimed at retaining key Thames executives. A person close to the process said this could raise questions about a potential conflict of interest that Thames would need to be transparent about in accepting any loan package.

A representative of the B class offer said Thames Water was "attempting to lock itself into an extremely costly short-term loan, and ignoring more affordable offers of financing it has received,” according to the press. 

Competing offers of ‘super senior’ emergency debt show that there are market-solutions available for assisting Thames, lessening the likelihood of it having to enter the special administration regime. 

• S&P downgraded Southern Water’s debt to BBB- “on challenging financing conditions” – high financing costs for 2025-30, likely exceeding the company’s future regulatory allowances. Southern’s chief financial officer, Stuart Ledger, noted the action, commenting: “Southern Water retains its investment grade rating and is financially robust and resilient. We are still awaiting Ofwat’s Final Determination on our ambitious investment proposals for the next five years which will be supported by our shareholder."