Thames Water: commercial expediency meets political rhetoric

(by Verity Mitchell)

London & Valley Water's (L&VW) improved offer for Thames Water, announced last week, took into consideration the political rhetoric of 'taking back control’. It included a government "golden share" to allow more ministerial involvement; new “supervisory structures”; an improved financial offer; no dividend payments for a decade; no additional bill increases; and an expansion of customer social tariffs to support households struggling with water bills.

The Government responded: “The prime minister has always been clear about the benefits of public control. The company remains financially stable, but we’re prepared for all eventualities, including a special administration regime, if that were to become necessary. We note that a new proposal has been submitted and Ofwat will consider it carefully, but it wouldn’t be appropriate to comment on the specifics of a commercial proposal whilst that process is under way.”

Ofwat must submit any deal to a three-month public consultation, and the outcome must be signed off by the High Court.

At the recent Environment Select Committee, ministers reiterated that special administration is a legal process triggered only where statutory tests have been satisfied (either insolvency or a serious breach of a water company's principal statutory duties). According to its annual report, Thames invested £2.68bn of capex – up 20% – to drive improved performance in 2025-2026. Mains replacement rates are up and leakage and pollution incidents have fallen. However, Thames is set to run out of money at the end of 2026, which would by default push the courts to approve special administration.

Meanwhile, the creditors have also engaged Pallas Partners, an ‘elite litigation and disputes’ firm, to go into battle if the Government attempts to take Thames into special administration. In that eventuality, the lawyers would pursue payment in full of the outstanding debts.

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Comment:

By taking the prime minister’s comments and reconstituting them into a new offer (with additional financial concessions), L&VW is raising the stakes. The previous offer included a 30% haircut, £3.35bn of new equity, £3.25bn of fresh debt and additional money to settle expected environmental penalties. The latest rating from credit analysts at Moody’s corresponds to an expected loss for senior bondholders of 35%-60%.

In the engagement of Pallas Partners, there are parallels with the Chinese owners of British Steel who are gearing up to try to recover hundreds of millions of pounds of loans from the company after the UK Government took over its operations. Jingye Group said it was assessing the chances of recovering debts owed to it by British Steel. It is thought to have engaged advisers from PwC to work out a valuation for the business.

The political rhetoric too, is escalating. 112 MPs have sent a letter to the Government, calling for the Thames creditors’ previous “outrageous” deal to be rejected, and for the company to be placed into special administration “without delay”.

Only outright nationalisation would definitively meet the new prime minister’s campaign rhetoric. Special administration, in contrast, is a temporary process in which the state just ensures Thames has funding. This could end up disappointing on the public control front. L&VW, with others, has expressed interest in acquiring Thames even if it enters special administration.