Thames Water Risks £3.6 Billion Debt Write-Off, Says BI

(Bloomberg) -- Britain’s biggest water supplier Thames Water might need to write down £3.6 billion ($4.6 billion) of debt if the government takes over control, according to a Bloomberg Intelligence report.

The company’s bonds have slid this week, with the utility in talks with officials over contingency plans including a temporary nationalization given concerns over its ability to service debt. Bonds from Thames Water face a writedown to meet rules from regulator Ofwat if the firm is sold to a new owner, BI’s Paul Vickars said.

“Finding a new owner may require a haircut of up to 25% on the nominal value” of the operating company’s bonds, wrote Vickars, senior credit analyst at Bloomberg Intelligence, in a report on Thursday. This would reduce regulatory gearing — the ratio of debt to the regulatory capital base — to the notional 60% set by Ofwat to enable a company to finance its operations at high grade level. This would be a “reasonable stipulation” for a new owner, he added.

The group’s liabilities at the operating company level include £12.9 billion Class A debt, which ranks more senior to £1.6 billion of Class B debt, according to its latest report to investors as of September 2022. These make up Thames Water’s so-called ringfenced liabilities. 

“Even in the unlikely event that the class B debt was fully written off, the priority class A debt would still need a haircut of 15% to bring regulatory gearing down to 60%,” Vickars said.

Other Instruments

On top of this ring-fenced debt, there are other instruments issued at the holding company level, which depend on the operating companies sending them cash. These are most at risk from Thames Water being placed into special administration, he said. 

A note issued by Thames Water Utilities Finance Plc and due in 2034 — part of the class A debt — has fallen by over 2 cents since Wednesday to 83 pence on the pound. Meanwhile, bonds issued by Thames Water Kemble Finance Plc, one of the entities at the holding company level, has slid by over 30 pence to around 56.

The company is still seeking cash from investors to service its debt pile and the government has not yet intervened, a minister said.

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“They are still in the process of finding further resources from their own shareholders and that’s the first place they should look to, obviously,” Health minister Neil O’Brien told Sky News Thursday. “Of course the government does have contingency plans if this does become a problem.”

Thames Water had £4.4 billion of cash and committed funding as of March 31, according to a filing on Thursday. Ofwat described this as “strong liquidity” on Thursday, though said the firm had issues to address including financial resilience and its environmental record.

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