Regulator calms Thames collapse fears

Ofwat has played down fears that Thames Water is on the brink of collapse.

While admitting that Thames “has significant issues to address”, the regulator pointed out that the company “has strong liquidity”.

It comes in response to mounting media speculation that the water company is at risk of being placed into special administration.

An Ofwat spokesperson said: “Over the last day or so, there has been a lot of commentary about financial resilience in the water sector with considerable focus on Thames Water in particular.

“We have been clear that Thames Water has significant issues to address – their environmental record and leakage performance, for example, are poor. Alongside the turnaround of their operational performance, they need to improve their financial resilience too.

“But that is all in the context of a company that has strong liquidity – it recently received an additional £500 million from shareholders and has £4.4 billion of cash and committed funding.”

The spokesperson added: “Overall, the sector is continuing to attract international capital and is especially attractive to long term investors such as pension funds. Indeed, there has been an additional equity injection of around £2 billion since 2020, with companies acting to strengthen their financial position.

“Ofwat will continue to keep companies’ financial resilience under close scrutiny and work with companies to ensure they take action to ensure that they have the financial backing to deliver for customers and the environment.”

Fears that Thames is facing collapse surfaced after the shock resignation of the company’s chief executive Sarah Bentley on Tuesday (27 June).

Despite, Ofwat suggesting that Thames has “strong liquidity”, Joanna Ford, restructuring & insolvency partner at Cripps, told Utility Week that shareholders may be reluctant to provide the extra £1 billion of equity funding envisaged in the most recent business plan.

She warned if they don’t stump up then they risk losing everything as the company would enter into a special administration regime which would ultimately kick off the process of finding a new owner.

However, Paul Vickars, senior credit analyst at Bloomberg Intelligence, said that “finding a new owner may require a haircut of up to 25% on the nominal value of the ring-fenced debt”.

He added: “We calculate that this would reduce regulatory gearing to the notional 60% set by Ofwat to enable a company to finance its operations at high grade level – which would be a reasonable stipulation for a new owner.

“Even in the unlikely event that the Class B debt was fully written off, the priority Class A debt would still need a haircut of 15% to bring regulatory gearing down to 60%. Based on the 55% notional gearing that Ofwat intends to apply for the 2025-30 regulatory period, the necessary haircut across all ring-fenced debt would have to be increased to 30%.

“If a new owner were to accept the sector average of around 65% gearing, the haircut would only fall to 20%.”