In a dramatic twist in the Thames Water debt crisis, rival groups of the utility giant’s bondholders are jostling to provide a much-needed £3bn cash lifeline. But experts warn the beleaguered board must play the factions against each other to secure the least onerous terms for the stricken company.
Thames Water, the UK’s largest water supplier serving 15 million customers, is drowning under a staggering £14bn debt mountain. With its credit rating reduced to junk and unable to access capital markets, the company urgently needs a multi-billion pound “liquidity runway” to keep the taps running.
Now, in a high-stakes showdown, two competing bondholder groups – the senior “Class A” investors and junior “Class B” creditors – have tabled rival emergency financing packages. Both are vying for pole position ahead of an eventual debt-for-equity swap that could see them become Thames Water’s new owners.
Class A Bondholders’ “Hellishly Expensive” Offer
Earlier this month, a consortium of Class A bondholders, including controversial US hedge funds Elliott and Silverpoint alongside mainstream UK investors abrdn and M&G, unveiled their £3bn proposal. Split into two £1.5bn tranches, their cash would command a hefty 9.75% annual interest rate plus substantial fees, coming in a “super senior” position ahead of all existing debt.
One city grandee slammed the Class A plan as “hellishly expensive,” noting the swingeing terms look aggressive even for a deeply distressed borrower like Thames Water. The effective interest rate could climb even higher once all levies are factored in.
Class B Bondholders Fight Back With Cheaper Deal
Not to be outdone, the Class B bondholder group has hit back with a seemingly sweeter deal. Also weighing in at £3bn, their “super senior” debt would carry a lower 8% interest rate and reduced fees, saving Thames up to £500m. Crucially, they offer the full whack upfront rather than the Class A’s two-step structure.
However, the Class B consortium, whose identities remain a mystery, has yet to table a legally-binding commitment to cough up the dosh. Pundits say this could come within days and will prove pivotal in swaying the Thames board.
The sensible approach for Thames’s board would be to generate as much competitive tension as possible. A state of war between rival groups of bondholders is not unexpected since both sides are jostling for position in the eventual debt-for-equity restructuring.
– City analyst quoted anonymously due to the sensitivity of the situation
Thames Board Urged to Play Hardball
Restructuring experts are urging Thames Chair Sir Adrian Montague to turn the tables on the circling bondholders and exploit their rivalry for all it’s worth. With even the “super senior” lifeline debt likely to be repaid in most conceivable scenarios, they contend Thames must fight tooth and nail for the least worst terms.
Thames finds itself in dire straits largely due to its own strategic missteps and rampant financial engineering by a succession of overseas owners. However, its status as a monopoly provider of essential services means some form of rescue deal is inevitable. The ultimate backstop would be temporary nationalization, with the taxpayer shouldering the burden.
If the Bs’ proposal can pass the credibility test, give it some public encouragement. Do not get ripped off.
– Senior London banker speaking on condition of anonymity
Ironically, the warring bondholder factions both know they will likely have to swallow massive writedowns and convert much of their debt to equity further down the line. But their current jockeying is a high-stakes battle for position in that process and the potential to shape Thames Water’s future ownership.
The Bottom Line For Thames Water
City grandees say the bottom line is that 9.75% interest plus chunky fees on “super senior” emergency debt simply cannot be deemed pretty, no matter how desperate Thames Water’s plight. The Board’s duty is to secure the most advantageous deal possible to keep the company afloat while longer-term restructuring options are thrashed out.
Key to that will be harnessing the competitive tension between the circling bondholder groups to extract concessions and more palatable terms. With the very future of the UK’s largest water company hanging in the balance, the high-stakes poker game is entering a critical phase from which there can be no turning back.
Key Takeaways
- Thames Water, drowning in £14bn debt, needs urgent £3bn cash injection
- Rival bondholder groups table competing emergency financing offers
- Senior Class A creditors’ proposal branded “hellishly expensive” at 9.75% interest plus fees
- Junior Class B group hits back with 8% deal that could save Thames £500m
- Experts urge Thames board to stoke bondholder war and fight for best terms
- Jockeying foreshadows inevitable debt-for-equity swap and ownership shake-up
- Thames plight largely self-inflicted but monopoly status makes rescue deal inevitable
- Temporary nationalization the ultimate backstop if restructuring plans founder
