Thames at the High Court: expensive restructuring or special administration

Thames Water’s restructuring plan has been under the spotlight during five days of questioning at the High Court. Lawyers, investors and other advisers have heard the competing and complex arguments for and against the proposals, including in terms of deliverability and cost.

Chief financial officer of Thames, Alistair Cochran, confirmed that the restructuring costs could reach £200m during 2025. The company is spending £15m a month on lawyers and advisors, the majority paid to Linklaters and Rothschild advising Thames; and Akin and Quinn Emanuel which are advising rival senior and junior debt holders respectively.

In addition, the utility will pay between £800m and £900m of interest charges on existing borrowings and the new loan from its A shareholders that has a 9.75% coupon. There will be further fees to lenders on top of this. Cochran confirmed that the restructuring loan would not be financed by customers. 

Equity need

Thames Water may need as much as £10bn in additional debt and equity contributions to repair its finances, according to a representative of creditors hoping to lend the struggling utility another £3bn. This is significantly more than the roughly £6.3bn Thames has previously indicated. The £6bn to £10bn range might stretch to cover unexpected costs, regulatory fines and new capital to cut down the company’s debt to a level that is acceptable to regulators and credit rating agencies.

However, some have questioned whether Thames will be able to raise all the new equity it needs. Covalis Capital wrote to the High Court explaining that it would need "significantly more information and greater engagement with Thames Water management than has been provided to date”. Covalis said, for instance, that Rothschild has failed to persuade either the chief executive or chair of Thames to attend the most recent meeting of prospective equity investors. Covalis has also publicly said that it considers that the restructuring proposals are “an impediment to a timely and material turnaround of the business”.

Meanwhile, Class B debt holders continue to argue that a cheaper funding solution could be available. 

Customer view

Charlie Maynard, the Liberal Democrat MP for Witney, was granted unusual permission to put forward the interests of households. He argued that putting Thames into special administration (SAR) would save on the significant interest and fees that continue to be incurred.

Thames refutes this, saying that the SAR would be ‘value-destructive’ and might jeopardise the support of prospective equity investors.

Meanwhile on the hearing’s opening day, campaigners supported by John McDonnell MP staged a protest outside the High Court against the temporary bailout, which they argue would cost each Londoner £250 a year. They called on the Government to block the £3bn crisis loan and instead to bring the company into public ownership. 

Notable absences

The judge, in his summing up on Friday, expressed disappointment at the failure of Defra or Ofwat to appear at the hearing, and their inability to provide any indication of the costs of special administration. This had placed the court in a “very difficult position,” he said.

The next round of equity offers is due on Monday. The judge is not expected to make a ruling on the loan until the end of next week at the earliest, and there is potential for an appeal.

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A summary of Thames’ plan

The plan, according to Thames, is an interim solution to facilitate progress towards a substantive restructuring which will likely be implemented through a subsequent plan.

It involves:

1. Injecting £1.5bn of new super senior funding into Thames, providing capacity for a potential further £1.5bn of new super senior funding.

2. Extending the final maturity dates and all scheduled payment dates of Class A debt, Class B debt and subordinated loans, for two years.

3. Cancelling all currently undrawn commitments under the Class A debt, Class B debt and liquidity facilities.

   
   

A new subsidiary of Thames Water Utilities Limited (TWUL) would be set up, which will lend £1.5bn to TWUL. The new company and TWUL would guarantee that loan. The loan will mature two years and six months from the funding date, with an interest rate of 9.75%, payable in cash semi-annually.

The plan has received the support of creditors holding around 90% of its secured debt, totalling approximately £16.5bn.

Thames’ directors say they have no confidence that, if the plan is not sanctioned, an alternative deal could be implemented in short order, before the company runs out of money. The alternative is special administration which would last approximately 18 months, during which period the Treasury would have to provide or obtain funding for Thames. The problem is that no-one has offered any estimate of the cost of special administration so no-one is able to compare the two alternatives.