Thames investors risk losing everything

With the government and Ofwat preparing contingency measures for the potential collapse of Thames Water, the company’s investors are once again being asked to provide more funding. Joanna Ford, restructuring & insolvency partner at Cripps, warns that failing to stump up more cash could see investors lose everything if the worse should happen.

Thames Water has been the subject of a number of damaging fines in recent years amounting to some £15 million, which places a further burden on its creaking balance sheet with overall debts of £14 billion. The resignation of Sarah Bentley, its chief executive, on Tuesday (27 June) after she was forced to give up her £1.6 million bonus package is a further blow that highlights the turmoil at the water supplier.

Although Thames Water is seeking additional funding from its shareholders, I can’t imagine that this will be a quick or easy process, as it is owned by a consortium of pension funds and sovereign wealth funds, who I understand are sceptical about providing further support having already provided new funding of £500 million as recently as March this year.

The conundrum for investors, though, is that if they don’t provide more funding and Thames Water then goes into administration, they will have lost everything. While Thames Water claimed to have a strong liquidity position as of 31 March, including £4.4 billion of cash and committed funding, the reported “contingency planning” indicates that there are serious concerns about the financial viability of the company. The legacy of former owner Macquarie Bank still weighs heavily on the water supplier, when billions of pounds of shareholder dividends were paid despite Thames’ rising debt.

Special administration

A special administration regime exists for companies that are too important to fail, such as utility companies, in order to ensure that customers receive continuity of supply and to reduce the risk of financial failure spreading across the market. This was used successfully with the collapse of energy supplier Bulb in 2021, which was run by professional administrators at Teneo until it was sold to Octopus Energy in October 2022.

The primary objective of administration is to rescue the company so that it can continue trading as a going concern – this is often achieved by the sale of its business and assets to another company within the same industry, which is what happened with Bulb. The costs of the administration are covered by the government by way of grants, loans, indemnities or guarantees, which are ultimately passed on to the taxpayer.

As with any company insolvency, it is mainly the shareholders that lose out, as they sit at the bottom of the pile when it comes to repayment. Secured bank lending would be repaid first, before other creditors such as HMRC, employees, and trade creditors.

Insolvent means that a company does not have enough money to repay all its creditors, and so if Thames Water was to go into administration then not all creditors would be repaid in full, and so they would also lose out to some extent – how much will depend on what there is left in the pot to go round.