How will approval of £3bn emergency debt package help Thames Water avoid collapse?

The Guardian

18-02-2025

Thames Water has won court approval for up to £3bn in emergency debt that will allow it to avoid collapse – at least in the short-term.
The debt package is an important staging post for the utility company, which supplies water and sewage services to nearly a quarter of the UK population, as it seeks to repair its finances.
Yet it still has a long way to go before it is out of danger.
Thames Water had said that it would run out of cash on 24 March. That outcome would force the government to take over in a special administration regime – a form of temporary nationalisation – in order to keep serving its 16 million customers across London and south-east England.
The company said the debt deal, with a host of investors and hedge funds, was the only option for its survival, but it needed court approval.
The high court also heard arguments in favour of the government taking control because it could be better for customers, and for a rival deal from a smaller group of investors. Both arguments were rejected.
There will be appeals against the decision. If they are denied, then the deal gives Thames Water £1.5bn upfront. It will live on monthly handouts from this pot to keep it going to the end of September. It could then draw on another two slices of £750m that could allow it to survive until May 2026.
Before that funding runs out, it must find new equity investors to put up even more money – as much as £7bn more, according to its lenders – to reduce its debt pile and give it enough cash to invest in fixing pipes and drains.
Thames Water has received at least four bids from potential new owners. They are understood to include deals led by the hedge fund Covalis Capital, the Scottish supplier Castle Water, and the Hong Kong-based CK Infrastructure. The private equity firm KKR has also been reported to be a possible bidder.
The debt deal makes special administration less likely. However, it could still happen if the company fails to come to an agreement with any of the bidders to take ownership.
A spokesperson for the Department of the Environment, Food and Rural Affairs said: 'The company remains stable and the government is closely monitoring the situation.'
The government could also choose to impose special administration, but it is desperate to avoid that outcome. However, some campaigners and politicians argue that nationalisation is the only way to end the financial turmoil.
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English and Welsh water bills are set by Ofwat, the regulator. In December it granted permission for Thames to raise bills by an average of 35% before inflation over the next five years. The court case will not change that decision.
However, there is an added complication: Thames Water has appealed against the water watchdog's determination, arguing that it needs more money to invest. The Competition and Markets Authority will have six months to review Ofwat's decision.
The judge who approved the debt deal found it was very likely that Thames Water's creditors would have to pay for the costs of the restructuring – and he would have considered blocking the deal if they did not. However, he wrote that the high court should closely scrutinise whether creditors do in fact take steep losses when deciding on the next stage.
The judge said that well over half of the first £1.5bn of equity would go on expensive interest and 'eye-watering' costs, including millions of pounds in fees for legal advisers. The company and the creditors have said the whole way through that those costs would be borne by existing investors when they take a 'haircut' (a loss) on their investments.
England's regional water companies were privatised in 1989, in the hope of making services more efficient. Thames Water had no debt at that point. However, under a series of owners, most notably the Australian investment bank Macquarie, its debts soared – reaching about £19bn at the end of last year.
Rising interest rates plus inflation-linked debts have meant the costs of repaying those loans have soared. At the same time, the government has started to demand more investment in leaking pipes and drains, amid public anger over sewage spills into rivers and seas.