The Thames Water situation - an update

Since our last blog regarding Thames Water and their precarious debt situation, there have been a lot of developments. Credit downgrades, investtors pulling funds, the possiblity of further fines - a lot has happened. A recent development even includes a potential fine of 104m due to breaches in releasing sewage into rivers. With debt, fines and the possiblity of renationalisation looming overhead, this has been a turbulent time for the UK's largest water company. 

 

It will come as no schock that we are very interested in all things water, so we have put together some of the key developments together in this installment of "Paws for Thought" 

Thames water were already in billions of pounds of debt. One of the trappings of privatisation for water companies is an increase in debt – this is essentially about generating large returns for shareholders and it comes down to refinancing so that investors can repay themselves part of what they paid to buy the company in the first place (this was covered in our last blog about this situation, as well as this extremely illuminating article by “The Conversation” Such high levels of debt can place the company in question in a precarious situation, especially in times of economic turmoil. With these debt issues, an historic habit of dumping raw sewage into rivers (which alongside the levels of scandal associated with this, also raises questions of where the bill payers’ money is going – the question over how the efficacy with which money is being invested has been raised and the threat of special administration) and the threat of what will essentially serve as renationalisation, the pressure to raise revenue was more than substantial. A deal with Ofwat to raise customers’ bills by 40%, which in turn would appease investors to help secure the much-needed cashflow, was needed. Thames Water’s 5 year plan was not satisfactory to Ofwat, with this outcome leading to investors pulling out of a making a significant injection of funding. 

 

This was a major blow, but there were more developments to follow... 

The plot thickens considerably, as last month, to compound their woes, their credit rating was downgraded to “junk status” by Moody’s. Moody’s are a major financial services company who provide credit ratings to investors. It’s all to do with the debt of the company in question and the risks associated with repayment – higher risk bonds could get a lower rating, making them much less attractive to potential investors. 

 

This put Thames Water in a licence breach, which meant that Ofwat could fine them up to 10% - it should be noted this could actually work out as significantly more than the potentially £104 Million fine for the raw sewage leaks – but with the possible Special Administration/renationalisation looming, the water company were put into “special measures” which essentially means Ofwat are keeping a much closer watch on Thames Water. This is because the business proposal made by the water supplier was deemed “unsatisfactory” by Ofwat and was put in place to monitor as well as avoid the possible fines relating to the contract breach (up to 10% of annual turnover). A more recent development, as of this month, sees them about to appoint an “independent monitor” to continue monitoring their progress and to regularly report back to Ofwat. They will also be monitoring their reinvestment into infrastructure, with the aim to avoid more sewage being released into rivers. 

 

Ofwat rejected Thames Water’s initial proposal to raise bills – instead reducing this raise by £92 a year. This still means that customers’ bills could go up by £99 a year. 

There have been so many developments in this saga, from debt, sewage leaks, investors pulling funding, credit status downgrades, special measures/independent monitors and the possibility of a £104m relating to releasing sewage. Every major development sees further measures to avoid renationalisation, the Special Administration that would bring the government intervention into the company. 

 

Could it get to this point? It seems hard to tell – if they can’t get on track in time, then quite possibly. It raises the question...how many more measures can be brought in by Ofwat before Special Administration becomes an inevitability?