Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
An independent assessment of the cost of keeping Thames Water afloat during a temporary renationalisation has been exaggerated, according to experts and investors.
A report prepared by advisory firm Teneo, and commissioned by the utility for a court hearing to approve a £3bn emergency loan, estimated that the UK government could charge Thames Water 9.5 per cent interest to lend it money to remain operational during a so-called special administration.
While Teneo calculated this “market rate” based partly on comparisons to the cost of equivalent loans provided to energy supplier Bulb after it fell into special administration in 2021, the linkage has drawn criticism from a range of industry experts and debt investors due to the different risk profiles of Bulb and Thames Water.
Tim Whittaker, research director at Scientific Infrastructure and Assets, said lending to Bulb was a “riskier” proposition than a regulated water company because the energy firm’s only “major asset was its customer book”.
“It [collapsed] during a time of significant energy market turmoil, with significant energy price risk that was difficult to hedge,” he added.
Teneo’s analysis could prove contentious as it forms the basis for Thames Water’s claims that creditors would lose more money in a special administration than in a debt restructuring that is planned after the utility has secured the £3bn from its top-ranking creditors.
One former water company executive, who is close to Thames Water’s efforts to raise new equity, described the claim that the government would charge the utility interest as high as 9.5 per cent as “nonsense”.
“Bulb is in a different sector, had no monopoly, and had no assets,” he said.
Teneo’s report states that Thames Water’s junior bondholders would likely face wipeout through a special administration.
These lower-ranking bondholders — which include London-based credit fund Polus Capital and US investment firm Zimmer Partners — are challenging Thames Water’s £3bn loan deal in court and are offering to lend the utility the same amount of money more cheaply and on less onerous terms.
The group has offered a loan at 8 per cent interest. Teneo’s report dismisses this cheaper deal as having “too many risks and uncertainties”.
Without the emergency loan, Thames Water — the UK’s largest water company that serves 16mn customers in and around London and is struggling under a £19bn debt mountain — will collapse into temporary renationalisation.
Its senior creditors, which include US hedge funds Elliott Management and Silver Point Capital, propose to charge 9.75 per cent interest on the £3bn loan.
The junior creditors have commissioned their own expert report from consultancy firm Interpath, which they expect will show that their debt would not be totally written off in a special administration and that they would be worse off under the utility’s proposed restructuring plan.
Thames Water said in a statement: “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”.
Teneo declined to comment, as did the Department for Environment, Food and Rural Affairs, which would take a key role in any special administration. The UK Labour government has said it favours a private-sector solution to the crisis at Thames Water over special administration.
Matt Cowlishaw, a managing director at Teneo who wrote the report, previously oversaw the special administration of Bulb.
The government lent to Bulb at an interest rate of 4.72 per cent “representing a 4.62 per cent margin on the base rate of 0.10 per cent at the time it was agreed”, Teneo’s report states, adding that the margin would currently equate to a rate of 9.37 per cent.
Teneo’s report also based its calculation on the 9.67 per cent yield on Thames Water’s outstanding bonds and the 9.75 per cent rate on the planned £3bn loan.
Teneo claims that an 18-month period of special administration could require between £3.4bn and £4.1bn of government funding.
The report argues that part of the added cost of temporary renationalisation could come from the company’s suppliers demanding better terms, and from rising bad debt levels as customers use the administration process as an excuse not to pay their bills.
Teneo also assumed that wage bills at the company would rise 20 per cent during a special administration, as “retention of people (particularly those in critical roles) becomes more difficult”.
One class B bondholder said these assumptions had little basis in reality and that there was “no comparison” between Thames Water and Bulb.
One person close to the higher-ranking class A bondholders said that it was “wrong to single out Bulb from the multiple data points used by Teneo”, however.
The person added: “The calculations reflect the significant deterioration of market sentiment and the highly complex operational turnaround and restructuring needed by Thames Water, which would be much more difficult and costly to deliver in [special administration]”.
