Sewage floating down rivers in the United Kingdom has turned into a noxious political symbol. However, a recent court decision involving Thames Water’s obligations focused more on the money flow than the water and effluent flow.
Amid the chaos of England and Wales’ privatised water sector, Thames Water stands out. In a last-ditch effort to escape temporary nationalisation at the end of March, the corporation, heavily indebted with roughly £19 billion, asked the court for permission to borrow an additional £3 billion from a group of current creditors.
This procedure, referred to as special administration, would protect the water supply for 16 million homes and companies in south-east England and London. However, it would also reverse Margaret Thatcher’s privatisation more than thirty years ago, causing a great deal of trouble for the Keir Starmer-led Labour government and the larger water sector.
Another reason why opponents of the most recent debt agreement have called for special management is that they believe it would result in more funding for repairing leaking pipes and sewers and less for the handful of businesses that are accruing exorbitant fees as a result of Thames’ problems.
Over 100 investors, bankers, attorneys, and other advisors attended the high court last week, either in two crowded courtrooms or via video conference, demonstrating the scope of the operation.
The interest expenses are egregious. Most of the time, the general public is unaware of the bond markets. However, when a business experiences severe financial difficulties, like Thames has, court cases can reveal how closely English home water rates are tied to international financing.
Two sets of possible lenders faced off against one another during the court session. An interest rate of 9.5% is being offered by one hedge fund that holds debt referred to as “class A,” while the smaller group of “class B” hedge funds asserts an offer of 8%. The class A group intends to distribute the £3 billion in two lots of £750 million, after an initial £1.5 billion.
For the benefit of customers, Charlie Maynard, a former investment banker and current Liberal Democrat MP for Witney, Oxfordshire, was permitted to get involved in the case. The class A offer, he said, was “ludicrously expensive debt.”
Andy Fraiser, Thames’ general counsel, told the court: “You can come up with a plan which is cheaper but is not deliverable.”
According to Maynard’s legal team, two-thirds of the £1.5 billion would “go into the pockets of debt investors and professional advisers,” including more than £440 million in fees and discounts and £245 million in interest paid to those investors. Numerous international banks and investors showed a great deal of interest in the court case; some of them even traded the debt.
The US firms JP Morgan and Goldman Sachs, the UK banks Barclays, Lloyds Banking Group, and HSBC, the Canadian banks Scotiabank and National Australia Bank, and the French bank BNP Paribas all seemed to be online attendees. Large investors, including hedge funds, also seemed to be following.
They included hedge funds such as the London-based Algebris and Insight Investment, along with America’s Diameter Capital, Bracebridge Capital, and Centerbridge. Additionally, well-known investors like Pimco, Corebridge, and Millennium Management were part of the group.
Although the class A group also includes hedge funds like Elliott Investment Management and Silver Point Capital, while the class Bs include Polus Capital and Covalis Capital, attendance does not always indicate that the companies have financial exposures to Thames Water. The names of the corporations involved were not revealed by either group of creditors.
To advocate for public ownership of public utilities including libraries, railroads, and water, Cat Hobbs formed “We Own It.” She stated that to restrict the flow of funds from Thames Water, the court ought to reject the debt agreement and instead opt for special administration.
“This is merely a ‘money-go-round,’ and they want to continue it for as long as possible. It would be an absolute farce if it were to proceed. In the restructuring, the interests of the creditors will be given top priority, whereas, in the special administration, they would not. Armies of advisors. Even if the interest rates are high, taking risks is rewarded,” she stated.
Nevertheless, the costs paid to all of those attorneys, bankers, and public relations consultants will also cause hundreds of millions of pounds to leave Thames Water in the upcoming months. Thames has enlisted the help of the restructuring advisory firm Kroll and the “Magic Circle” law firm Linklaters.
They faced Quinn Emanuel, a class B legal firm, along with other professionals. Thames receives PR help from Edelman Smithfield, the class A group receives guidance from Hanbury Strategy, and the class Bs are represented by Greenbrook Advisory. While rival Moelis & Company is advising the bondholders of its parent company Kemble, Thames Water has also enlisted the investment firm Rothschild & Co. to look for new equity investors to take over ownership.
Thames was incurring costs of approximately £15 million each month for restructuring, according to Alastair Cochran, the company’s Chief Financial Officer.
The total cost of the process might come to over £200 million, which is a minor sum compared to the water company’s enormous bank sheet but a large payout for all parties concerned. The class As, class Bs, and Thames Water all refused to provide specifics about the process fees.
Thames’s rates have been increased even by the regulator, Ofwat. In its annual report released this week, it stated that it had ordered Thames to repay £6 million for work done on the business during the fiscal year 2023–2024. Lazard, Ofwat’s in-house investment bank, has been brought in to provide advice. One more round. Those close to Thames Water think that if the corporation did not hire counsel, it would be criticised from the opposite side.
Whether the Thames can remain privately owned, which the business claims will save the taxpayer money on maintaining it, will be largely determined by that recommendation. The business and its creditors strongly dispute that the fees would eventually be covered by invoices, claiming that creditors will cover them when the business’s balance sheet is repaired.
During an interaction with The Guardian, a Thames representative said, “Any suggestion that customers will bear costs from this process is an untrue and misleading claim that risks needlessly worrying our customers.” Customer bills won’t shoot up as a result of this proposal.
“The cost of bills for the upcoming five years has already been established by Ofwat. Our strategy is still the only workable way to give the company a stronger financial foundation. Customer bills won’t change if it’s approved, but billions of pounds will be available for network improvements, pipe repairs, sewage treatment plant upgrades, and the preservation of clean drinking water,” the person stated.
The trading firm Jefferies, another adviser to the class As, estimates that those billions of pounds might total an additional £7 billion. These funds will need to be restructured later this year. The fees will therefore continue to be collected.
Another firm, Teneo, estimated that even in the case of a special administration, consultants would charge £98 million to arrange finance. This would include £63 million for administration costs, £25 million for legal fees, and an additional £10 million for merger consultants. Thames has paid £5 million for PR and restructuring advice to Teneo, which may be a candidate to lead the special administration.
“This is only the first of many levies that are gradually increasing in amount. There’s another fees fest coming up the road,” Maynard, whose attorneys Marriott Harrison and William Day worked pro gratis, stated.
The financial troubles of Thames Water highlight the challenges facing England and Wales’ privatised water industry. As the high court deliberates on the company’s borrowing strategy, the stakes are high, not just for Thames Water but also for the millions of consumers who depend on its services.
The outcome of this case could determine whether privatised utilities can deliver on their promises or if public ownership is the only viable path forward, shaping the future of water management in Britain.