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Thames Water has warned a group of bondholders that they risk tipping the UK’s largest water company into a default and even temporary renationalisation if they try to derail the utility’s deal for an emergency £3bn loan.
The troubled utility has issued a stark warning to its junior bondholders that their plan to propose their own rival loan in court next week risks triggering an “event of default” across Thames Water’s £19bn debt stack.
The utility cautioned that such an event would limit its ability to spend money on infrastructure improvements and would risk putting the business in breach of environmental laws.
At that point, the utility’s board may “no longer be prepared to accept the legal, regulatory and environmental risks and enter into discussions with Ofwat and Defra as to the entry into special administration,” according to a December 9 letter to the junior bondholders from Thames Water’s lawyers at Linklaters.
The government’s special administration regime is a form of temporary nationalisation. There are growing calls for the company to be brought under the SAR so that Thames Water can focus on improvements to the water and sewerage infrastructure and restructuring, rather than on negotiating a deal with creditors.
Thames Water warned in the letter that the junior bondholders’ planned course of action posed “imminent and irreversible jeopardy” given the “grave consequences” a default would have on the company and its creditors.
Thames Water told the Financial Times that it wants all creditors to work together. It said there is no risk to services while a deal is negotiated, nor even if it were tipped into special administration.
The intervention from Thames Water comes after its management agreed to accept a loan of as much as £3bn from the company’s top-ranking bondholders in an attempt to stave off renationalisation.
The utility, which supplies water and sewerage services to 16mn customers in London and surrounding areas, is struggling under its debt mountain and has warned that without the loan it risks running out of cash in March.
The company is burning through millions of pounds in advisory, legal and consultancy fees but hopes the loan will buy it time to secure new equity investors next year.
However, the group of rival bondholders who own lower-ranking debt are opposing the deal, which comes at a 9.75 per cent interest rate and could cost the company as much as £800mn if it is fully drawn over the next 2.5 years.
They have proposed a cheaper loan and are planning to state their case in a preliminary court hearing on Tuesday that is meant to start the process of officially approving the loan.
Both loans would rank ahead of Thames Water’s existing bonds. The rival creditor groups are keen to protect themselves against losses in any restructuring of the company’s debt, with the junior, or class B, bondholders in line for greater losses in an insolvency.
One person close to the class B bondholders accused Thames Water of “playing an elaborate game of chicken where they threaten us with special administration”.
The class B bondholders disagree with Thames Water’s analysis, according to another person familiar with their position. They argue that any so-called “restructuring plan” risks a default being triggered at some stage but that it is typically manageable through various legal manoeuvres.
While the proposed class B loan would cost the company less money, Thames Water has argued that it would be challenging to implement, given likely opposition from the more senior class A creditors. Thames Water also pointed out in its letter that the class A plan had already obtained waivers from its creditors that prevent a default — but that these could “lapse” if the deal is overturned.
The loan agreed with the class A bondholders also allows for a new package of “retention” incentives for Thames Water’s management team on “terms acceptable” to the creditors. Thames argues that this is to ensure management continuity but no details have yet been agreed.
Thames Water separately announced on Friday that it expected a group of lenders that had provided it with interest rate swaps would support their plan in court, after the company proposed tweaks to the terms to benefit them.
It said in its statement to the FT that it has a “robust plan that will be tested in court” and that it remains “confident of delivery”.
“The board and leadership team remain focused on turning round the business and continue to believe a market-led solution is the best financial and operational outcome for customers, the environment, UK taxpayers and the UK economy.”
Linklaters and both groups of bondholders declined to comment.
