Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Thames Water’s lower-ranking bondholders have submitted a rival £3bn financing offer for the struggling utility as creditors battle over the future of the UK’s biggest privatised water company.
The proposal, sent early on Thursday, would cost Thames Water 8 per cent in annual interest and provide the entire sum up front, compared with a more expensive deal put forward by senior bondholders, and which the utility has already agreed in principle.
The class B group, which includes hedge fund Polus Capital Management, said their offer comes with “a far lower cost and on more flexible terms”, adding that the deal “is open to all class A and class B holders”.
The utility already agreed in principle a deal for a £3bn loan charging an annual 9.75 per cent interest rate, as well as steep fees, with a group of senior class A bondholders, which holds £12bn of debt. The senior bondholders include US hedge funds Elliott Management and Silver Point as well as UK asset managers Abrdn and M&G. BlackRock is a member of both groups.
The battle between creditors comes as Thames Water presses ahead with plans to raise more than £3bn equity — in addition to the emergency financing that it has asked creditors for — which is needed to stabilise the company. The utility, which provides water and sewerage services to 16mn customers, is struggling to avert renationalisation as it faces a £19bn debt mountain and has warned that it could run out of cash by Christmas.
The equity raise is being run by Rothschild, with non-binding bids due to be submitted by the end of this month. Castle Water, which supplies billing and customer services to Thames Water’s business customers, has emerged as one potential bidder but other creditors may come forward in a potential debt-for-equity swap.
The deal offered by the class A lenders would provide cash monthly and in two tranches — an initial £1.5bn to last until October 2025 and a further £1.5bn if the company agrees to go to the Competition and Markets Authority to challenge regulator Ofwat’s price settlement next year.
A detailed financing proposal was initially tabled by the class B bondholders last week, but at that point the group had yet to secure official commitments from its members to provide the cash. These commitments have now been made.
The group’s loan offer would still need approval from class A bondholders, which could prove a sticking point as the new debt would rank ahead of their bonds.
The class B group said on Thursday that it was calling on “all of the company’s other creditors to support this committed financing on that basis, rather than needlessly paying lenders interest on expensive debt with money that could be spent investing in the water and wastewater supplies of London and the Thames Valley”.
The class A bondholders would be paid ahead of any class B if the company were to become insolvent, while the new loan would rank ahead of all existing debt.
A spokesperson for the class A bondholders declined to comment on the rival offer.
Any deal is also contingent on the price settlement with Ofwat, which is due to be announced in December or early next year. However the regulator has indicated that it will concede to some of the investor demands and agree to steeper increases in bills.
Thames Water has requested a 53 per cent rise in real terms after the water regulator rejected its proposal for a more modest 44 per cent jump earlier this year.
Thames Water declined to comment.
https://www.ft.com/content/c8c54871-e6a2-4d5e-8634-71b7f0162741
