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The US industrialist J Paul Getty is said to have remarked that “if you owe the bank $100, that’s your problem. If you owe the bank $100mn, that’s the bank’s problem.” Although Thames Water may soon default on some of its £19bn debt, it clearly remains the utility’s problem.
Thames Water has plenty of those. It serves almost a quarter of the British population and has 32,000km of mains and 109,000km of sewers but it is in a mess, 36 years after privatisation. Sewers are leaking, bills are rising and creditors are trying to arrange an astonishingly expensive restructuring while the company battles its regulator Ofwat over investment plans.
As the judge wrote last month in a case pitting one set of bondholders against another, Thames Water’s customers and bill payers (including me) “will be horrified” by the £800mn interest cost of the planned rescue. There is no creditor haircut ugly enough to make us feel better about the incompetence and exploitation that led to this pass.
But we are where we are, repugnant though it is, and there are few alternatives for the company to keep operating and regain financial stability.
One is that the government intervenes and takes it over. A second is that bondholders restructure it privately and agree to new owners. They might even become owners themselves, via a debt-for-equity swap and fresh investment.
The third way is the appointment of a special administrator to run Thames Water and somehow sort it out. This is supported by observers including Charlie Maynard, Liberal Democrat MP for Witney, and has attractions in terms of clarity and independence from the creditors. But an administrator could not print money: the company would still need to be refinanced.
The question may soon be moot. While Mr Justice Leech approved the restructuring plan proposed by the utility’s senior creditors, his ruling could be overturned by the Court of Appeal later this month. If so, the company would probably fall into administration after finally running out of cash. It might then need an emergency loan from the government to tide it over.
The government does not want to nationalise Thames Water and take on the burden of ownership, as some Labour MPs would prefer. It could reduce some of the high costs of a refinancing led by private creditors but it would also transfer financial risk to taxpayers. Other pressures on the public budget, including for defence, have already taken priority.
Happily for the government, there are still some potential bidders, despite all of the financial distress and public scandal. Both CK Infrastructure of Hong Kong and the private equity group KKR have made preliminary bids to take over the utility if its debts can be restructured. Hope springs eternal in financial markets and there is a price for everything.
This is the “market solution” favoured by the holders of most of Thames Water’s debt, a motley crew of infrastructure investors and hedge funds. If about £6bn can be shorn from its net debt, the ship may sail on under new ownership and an investment-grade flag. The judge agreed to let them try, after being assured that they would bear the financing costs.
Justice dictates that creditors should suffer to show that lending returns come with risks. The judge noted the temptation to block the restructuring, in which over half of £1.5bn in fresh loans “go round in a circle and back into the pockets” of creditors. The fact that the company’s management supports it is neither here nor there.
But there is also justice in the fact that Thames Water’s equity owners, including Chinese and Abu Dhabi sovereign wealth funds, and UK and Canadian pension funds, are likely to be wiped out. There is some payback, too, in the inevitability of a creditor haircut, even one that could leave them in control. An administrator would have to cut some kind of deal with them.
Getty’s dictum fails for Thames Water because, for it to become the lenders’ problem, the borrower must be able to walk away. I only have to turn on my taps or flush a toilet to show why this does not work for a public utility. It not only needs to operate without interruption but to raise fresh debt in future: the UK water sector plans to invest £108bn in the next five years.
Margaret Thatcher should have thought of that when the sector was privatised in 1989, but it took decades for the full implications to become clear. Short of being taken back into public ownership, there is no choice for Thames Water but to keep borrowing and carry on.
