Thames Water creditor compares UK to Puerto Rico over treatment of lenders
Dominic Frederico, the boss of US insurer Assured Guaranty, suggested that the UK government would not impose losses on creditors. The company – with an exposure of $2.4bn (£1.8bn) to Thames Water's bonds – was 'well protected in terms of the legal structure' from losing money, he told investors on a call on 8 August.
'The joke I make internally, and I'll put it out here over some criticism, is that even in Puerto Rico's case, they paid the water bill,' he said. 'So I'm assuming the UK government will do the same.'
Puerto Rico, a US territory, went through the biggest municipal default in modern history, beginning in 2014. However, its water company debts were not hit, preserving returns for investors.
The comments underline the scale of Thames Water's crisis, as well as the expectation of some its senior creditors that they will not lose their money. Thames Water has been under the effective control of its senior creditors, which hold the bulk of its £17.7bn debt pile since shareholders walked away from the company last year.
The creditors have proposed a £5.3bn injection of equity and debt to take formal control of Thames Water and try to turn it around. However, the creditors insist that no recovery is possible without leniency on pollution fines from Ofwat, the water regulator for England and Wales.
That proposal is deeply controversial and has led to a stand-off, with the environment secretary, Steve Reed, insisting that Thames Water must continue to meet the same environmental standards as rivals. The government has faced calls for it to place Thames Water into special administration, effectively a temporary nationalisation which would probably impose significant losses on creditors.
However, Assured Guaranty has said that it is confident it will not lose money, and that Thames Water will stay out of government control. Frederico said that he was 'very comfortable' that the creditor plan would be approved.
Assured Guaranty's exposure to UK water companies has risen to more than $16bn in June, up from $10.6bn in March 2022, according to quarterly filings. Its biggest exposure was $2.8bn on Southern Water, another British water company that has faced financial difficulties.
The insurer has said that it feels 'pretty good' about its exposure to Britain's privatised water companies. Its chief financial officer, Benjamin Rosenblum, said in February: 'The UK government has stated that they really don't plan to nationalise the water utilities and frankly, they don't really seem to have the room in their budget to do so, and they would like to see additional investment. So I think the macroeconomic background for the UK water sector looks pretty good.'
Dieter Helm, an Oxford University professor who has advised previous Labour and Conservative governments on energy and water policy, said this week that the creditor offer was 'a plan designed to protect their debt' and that it did not appear to address Thames Water's long-term problems.
Helm said that 'Thames is, in principle, a very viable asset' because of rising bills that guarantee revenues but added that creditors are not likely to back debt write-offs that would impose losses on themselves. Several of the creditors bought the debt at a discount from the original lenders, meaning they could still make large profits even with a large cut in the amount Thames owes.
A Thames Water spokesperson said: 'A special administration regime doesn't fix Thames Water's problems. It will delay the delivery of improvement for our customers and the environment. It will be disruptive, add risk and uncertainty, increase costs, hinder our operational turnaround, destabilise our stakeholders and colleagues, and will not fix the balance sheet.
'A market-led recapitalisation is the quickest and most effective route to financial stability, sustainable investment and better outcomes for customers and the environment.'
Assured Guaranty and the Thames Water senior creditor group were approached for comment.
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