Thames investors split on stumping up extra cash

Thames Water investors are split on whether to inject additional capital into the struggling firm, Utility Week has learnt.

It is understood that Thames’ biggest British shareholder, Universities Superannuation Scheme (USS), is poised to stump up extra investment to stop the firm from being put into the special administration regime.

However, sources close to the negotiations have suggested that foreign investors are still to be convinced.

Investors collectively put £500 million into the company in March, however they are being asked for an additional £1 billion.

It is understood that Thames Water’s largest shareholder, Ontario Municipal Employees Retirement System (OMERS), is among investors yet to be convinced to inject additional capital into the struggling firm.

According to one source, the Canadian pension fund – which owns a 32% stake in Thames – is “really nervous about throwing good money after bad”.

“USS is at the table and more or less ready to invest the extra money,” the source said. “However, they are waiting on the Canadians to make their move.

“While they haven’t ruled out extra investment they are currently reluctant as they are worried that they will lose the money they have already put in.”

The source added: “If the Canadians back the extra investment then I think everything else will fall into place and all investors will follow suit. While they are not a majority shareholder they are the biggest investor and therefore have the most to lose, or gain.”

The Universities Superannuation Scheme, the UK’s biggest private pension fund, is the second largest shareholder with a 20% stake in Thames. Other shareholders include China Investment Corporation, the country’s sovereign wealth fund and Infinity Investments, a subsidiary of the Abu Dhabi Investment Authority. Hermes, which manages the BT Group pension scheme, is also a shareholder.

As well as being nervous about the possibility of a special administration, it is understood that OMERS is also wary about proposed policy changes made in regards to dividend payouts and performance-related fines.

The water regulator has proposed strengthening its powers to block dividend payments, among other measures, if a company’s financial resilience is not secure. Ofwat’s plan includes extending its powers to take enforcement action against companies that fail to link dividend payments to performance or provide transparency over payments.

Water companies also face the prospect of “unlimited fines” for environmental breaches or customer service underperformance. Announced in the Plan for Water, the government’s preferred option is to lift the upper cap on civil penalties on water companies allowing unlimited fines.

Joanna Ford, restructuring & insolvency partner at law firm Cripps, told Utility Week that “it makes sense” that investors would be nervous given the situation.

“Investors will always be reluctant about throwing good money after bad,” Ford said. “The last thing they will want to do is put in more money if they think there is a good chance the company will go into administration.

“You can fully understand shareholders being nervous. They have already injected an additional £500 million into the company this year and talks have clearly been ongoing for a few months now about raising more investment without reaching a conclusion.”

She added: “By their very nature pension funds are very conservative with their spending. Their default position will be to adopt a cautious approach to situations like this, so they will need reassurances that they will see a return on their investment.”

Susannah Streeter, head of money and market at financial services firm Hargreaves Lansdown, added: “The big question is whether the company’s investors, including overseas pension and sovereign wealth funds, will be willing to stump up a promised financial lifeline of £1 billion.

“Pouring more money into the financial black hole Thames Water appears to have dug is clearly an unwelcome prospect, with little hope of future returns given the huge infrastructure work needed to mend leaks and sewage discharges.”

With Thames due to file its next set of accounts on 15 July, Ford added that she would not be surprised if they delayed publication to buy themselves more time to secure extra investment.

She added: “If Thames Water files its accounts later than usual, but still before its official regulatory deadline, this will raise a few eyebrows given everything else that has been going on in the last week. If it files its accounts beyond that deadline, however, Thames Water could be liable to late filing penalty fees.  More importantly, failure to file accounts on time is a criminal offence under the Companies Act and its directors can be personally fined in the criminal courts.

“Whilst it is not uncommon for companies in financial difficulties to delay filing their accounts in order to avoid a qualified auditors’ report, it would be a risky move for Thames Water given the public scrutiny it is under at the moment, and would add to current speculation that it is teetering on the brink of collapse.”

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

Despite the fears, Ofwat issued a statement playing down the prospect of Thames’ collapsing, pointing out that the firm “has strong liquidity”.

It is a point that Thames Water stressed in its latest statement. It adds: “As envisaged in June 2022, Thames Water received the expected £500 million of new funding from its shareholders in March 2023 and is continuing to work constructively with its shareholders  in relation to the further equity funding expected to be required to support Thames Water’s turnaround and investment plans.”

The firm has also drafted in Sir Adrian Montague as its new chair. Montague will join Thames on 10 July, succeeding Ian Marchant who announced in April this year his intention to step down once the company had appointed his successor.

Montague arrives with a reputation for turning around firms in a crisis. In 2002, he was brought in as chairman of British Energy when the UK nuclear plant operator got into financial trouble, leading the company’s restructuring, recovery and eventual sale to EDF.

He also played a key role in the formation of Network Rail in 2001 after its predecessor Railtrack fell into administration.

Sources told Utility Week his appeal goes beyond experience with companies in turmoil. They said Montague is well-connected in the City and able to get financial backers for raising much needed funds.

In response to the Thames situation, non-profit organisation We Own It has launched a petition calling for the firm to be taken into public ownership.

The petition adds: “The government must take Thames Water into special administration and keep it in public ownership, which at the time of writing had been signed by more than 13,000 people.

“This means copying the model of Railtrack becoming publicly owned Network Rail NOT the model of Bulb being temporarily nationalised then returned to the private sector.”