Thames Water Faces Debt Sale Amid Regulatory and Financial Challenges

Key Takeaway

• A lender to Thames Water plans to sell £500 million of loans and £100 million of bonds amid financial challenges and regulatory delays.
• Thames Water's debt discussions are on hold due to the UK election, adding pressure as it depletes a £2.4 billion funding reserve.
• In contrast, National Grid Plc announced a significant £6.8 billion capital raise, highlighting stark differences in investor confidence between sectors.

Thames Water Debt Sale

A lender to Thames Water is preparing to sell approximately £500 million ($635.5 million) of the utility company's loans, according to sources familiar with the matter. The debt package, which includes class A and class B bilateral loans made to the operating company, is expected to enter the market soon. Additionally, the seller is looking to offload £100 million of the company's bonds. Thames Water, which has a debt load of around £16 billion, has faced significant financial challenges, including a default by its parent company, Kemble Water Holdings Ltd., on £1.4 billion of liabilities in April. This default occurred after shareholders decided against injecting £500 million of capital as previously planned.

The company's bonds have seen a decline, prompting some money managers to purchase the notes last month, betting that any potential restructuring would be less severe than current market pricing suggests. However, the liquidity of loans remains a concern. Thames Water and its creditors had initiated debt discussions ahead of a crucial decision from the UK water regulator Ofwat on the company's next business plan, initially scheduled for June 12. However, this decision has been postponed to July 11 due to the upcoming general election, effectively putting discussions on hold.

Regulatory and Political Delays

The delay in Ofwat's ruling is attributed to the purdah period, during which no new legislation or government announcements can be made to avoid influencing the election. This postponement adds pressure to Thames Water's financial situation, as the company is depleting a £2.4 billion funding reserve while seeking new equity investors. If these funds run out, the company may need to be placed into special administration by the government, a form of temporary nationalization.

Moody's Ratings recently downgraded Kemble creditors, indicating that they are unlikely to take any action until there is more clarity about Thames Water's financial situation. The crisis for Thames Water and its parent company Kemble began in March when Ofwat officials privately indicated that Thames's business plan proposals were unlikely to be accepted. Shareholders subsequently declared the business plan "uninvestible" and refused to inject additional equity, leading to Kemble's default and subsequent debt talks with creditors.

National Grid's Capital Raise

In contrast to Thames Water's financial struggles, National Grid Plc has announced a significant capital raise of £6.8 billion ($8.6 billion), marking Europe's largest rights offering outside the banking sector in 15 years. This move is part of a broader £60 billion spending program aimed at maintaining and upgrading existing infrastructure while preparing for future demand. National Grid plans to continue issuing senior debt and using hybrid debt to maintain balance-sheet strength, with gearing expected to drop to the low 60% range.

Paul Vickars, a senior credit analyst at Bloomberg Intelligence, highlighted the contrast between National Grid and the UK's water sector, stating, "National Grid is a clear contrast to the water sector, which arguably faces more urgent funding needs but where investors are more reluctant to inject equity." This sentiment underscores the challenges faced by water companies like Thames Water, which has a gearing of 79.5% and £16 billion in debt. Thames Water is currently struggling to secure the investment needed to continue operations and avoid special administration.