Thames sets out plans for a £3bn liquidity lifeline

Thames Water announced on Friday its intention to enter into negotiations to access what it calls a Liquidity Extension Transaction of up to £3bn of new money, together with accessing existing debt reserves and debt extensions.

There will be short-term financing arrangements to provide liquidity to February 2025, to allow a restructuring programme to be delivered through the courts. A convening hearing has been scheduled for 17 December and an agreement could be effective by the end of January 2025.

Thames said debt creditors of £6.7bn have agreed to a Transaction Support Agreement and a substantial additional group are in discussions to sign up. Importantly, the maturities of A and B class debt would be extended for two years, interest payments would be continued and its covenant package would be renegotiated to facilitate a future recapitalisation.

Thames said this would allow it to continue with planned investment, continue the recapitalisation and refinancing process, complete the Final Determination (FD) process and appeal to the Competition and Markets Authority (CMA) if necessary.

The so-called ‘super senior funding’ comprises £1.5bn of funds which are supported by a backstop arrangement by some A and B class creditors. Other debt holders will be able to participate on a pro rata basis through voting for the restructuring plan. The maturity of the debt will be 2.5 years from the initial funding date.

A further two tranches of funds of £750m are possible if Thames has to refer its FD to the CMA. This would give it liquidity until May 2026.

The funding will be released on a monthly basis subject to conditions that include progress towards a holistic recapitalisation programme and a creditor agreement.

The proposal is predicated on Rothchild & Co. continuing to work on a mandate to raise £2.25bn of equity. Even with any preliminary expressions of interest from investors, the availability of new equity will depend on the allowed returns and Thames’ FD allowances.

The news follows operational progress at Thames, which was recognised by Ofwat earlier this month when it moved the company from the ‘lagging behind’ to the ‘average’ category in its Water Company Performance Report for 2023/24. Friday’s proposals are timed to demonstrate that Thames remains an attractive investment proposition, provided that over £2bn of significant regulatory financial liabilities and penalties are clarified, funded or deferred.

Management highlighted the potential liability from remediation of sewage treatment works at £1.7bn. Thames submitted £1.04bn of this in its draft business plan but Ofwat contended that this has already been funded in previous reviews. The remaining £650m Thames said relates to dry spills. As the EA’s investigation is not complete, Thames regards this expenditure as being eligible for funding by customers in future AMPs. Thames also flagged an additional £0.5bn of potential other penalties, fines, unfunded costs and remediation work that may crystallise during AMP8.