Thames ‘unlikely’ to attract traditional utility investors, experts warn

Thames Water will have to seek investment from outside the traditional pool of backers within the utility sector, as it scrambles to raise capital to pay off its debts.

Joanna Ford, restructuring & insolvency partner at law firm Cripps, told Utility Week that traditional investors within the water sector are unlikely to buy into Thames Water due to its current financial crisis.

She added that even if the firm goes through a special administration process, those traditional investors – such as pension funds – are unlikely to take a stake in the country’s biggest water company.

“They [investors] are going to be interested in stable investment, and businesses that are profitable,” Ford explained, “So it does narrow the market for a business when it is in distress because it makes it less attractive to those types of investors.”

Debt-laden Thames Water’s parent company Kemble confirmed on Friday [5 April] that it had defaulted on its debt after missing an interest payment. It requested an extension from lenders to allow time to stabilise and has appointed turnaround consultant Alvarez & Marsal to handle negotiations.

The future of the country’s largest water and sewerage provider counties to be unclear, with Teneo understood to have been appointed to advise on a special administration regime (SAR).

It comes after Thames’ investors pulled out of a commitment made last year to inject £500 million into the business.

The SAR process is designed to ensure essential services are not disrupted for customers in the event of a company failing.

Teneo handled the Bulb administration before the business was acquired by Octopus Energy. As an energy retailer, Bulb was a far smaller operation without the asset base of Thames Water. Its SAR still cost billions of pounds, which is ultimately picked up by the taxpayer.

Should Thames face an administration process, repaying securitised creditors would be prioritised ahead of the standard shareholders, who would receive a smaller amount than they invested.

Speaking after the shareholder funding U-turn, Thames Water chief executive Chris Weston said he remained optimistic that a favourable regulatory environment from Ofwat could persuade existing or new investors to put more money into the business.

However, Ford warned that the pool of possible investors is shrinking by the day.

“Any new investors would need to be someone who could potentially see a way of making it profitable and improving operations,” Ford said and explained the business would be in a better position following an SAR.

If the debt is wiped from the balance sheet, money being put into the organisation could be spent on the necessary improvements rather than servicing debt.

She said it was therefore more likely to appeal to specialist investors who either have a knowledge of the water sector, or those with a particular interest in distressed businesses and assets who can see the possibility of turnaround and profit on the other side.

“What it boils down to is what price people are willing to pay,” Ford said.

Analyst Martin Young told Utility Week that Southern Water’s takeover set a precedent of what new equity owners could do for an ailing company.

“The way that Macquarie went in to Southern Water is a precedent example of where new equity came in to a company and ended up taking a meaningful percentage (62%) of the company,” Young said.

In 2021, Southern Water, which faced a similar raft of regulatory fines, operational problems and investment needs, came “very close” to being taken into SAR. Former Ofwat chair Jonson Cox co-led the financial restructuring process at Southern that ultimately resulted in Macquarie buying a majority stake.

The Australian infrastructure investor, which owned a majority stake in Thames until 2017, ploughed £1 billion into Southern, thus avoiding the SAR. Cox described the situation as a “stark example” of how poor performance could have a material impact on a company’s equity value.

The capital injection enabled Southern to upgrade its network by investing £2 billion in underperforming assets after regulatory penalties for poor environmental performance left it unable to make improvements at the required pace.