Thames lenders moot debt to equity swap in discussions with Ofwat on final determination

The lending syndicate to Thames Water, holding liabilities of over £12bn, has held a meeting this week with Ofwat to discuss a business plan, according to press reports.

Creditors argue that Ofwat has to provide some supportive flexibility in its final price determination for AMP8. The price control will be signed off by the Ofwat board by mid November so time is of the essence to influence the regulator’s deliberations.

The syndicate is looking at the possibility of a debt to equity swap which would provide the initial financial stabilisation to allow the company to raise further new equity. There are also plans to provide Thames with short term liquidity of up to £1bn.

All this is predicated on a balance of bill increases for Thames’ customers to allow the company to improve its performance. The alternative appears to be Thames being forced into the Special Administration Regime (SAR). This is likely to be more costly. Either the taxpayers would bear the substantial restructuring and refinancing costs, or as proposed in upcoming primary legislation, these would be spread across the industry and added to other water customers’ bills.

It would also subordinate the claims of the existing lenders and most importantly would be regarded as a significant disincentive for potential investors in UK water in the future, through a diminished regard for UK water regulation. 

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Comment: More than the credibility of water regulation at stake as Thames write-downs loom over investment summit

The government’s summit today (14 October) to promote investment in the UK takes place against a backdrop of investment write-downs in stakes in Thames Water. 

Abu Dhabi’s sovereign wealth fund, the Abu Dhabi Investment Authority (ADIA), wrote down the value of its 9.9% stake in Thames from £263m to £1 in its accounts filed in June. This was because of the ‘challenging regulatory environment and operational performance,’ and is another blow to the credibility of the Government's inward investment aspirations given similar write downs by key shareholders USS and OMERS.

ADIA has also, according to the press, written down a £31m loan to one of the holding companies in Thames. 

It is reported that the head of utilities at ADIA was one of the water investors invited to a private meeting with the environment secretary, Steve Reed, last month. Unsurprisingly, there were complaints about the draconian regulation of the water industry. 

This piles additional pressure on Ofwat to consider the potential wider political and regulatory fall out from a punitive final price determination which will be announced in December or January. Mismanaging the process could undermine the credibility of Ofwat itself and jeopardise its own future as water regulator.