Thames Water has suffered a setback as US private equity titan KKR withdrew from plans for a rescue deal to pump much-needed funds into the beleaguered utility. The UK’s largest water supplier, serving 16 million customers in and around London, selected KKR at the end of March as its preferred bidder under plans to invest around £4 billion of new equity to help keep the financially distressed company afloat.
However, the heavily indebted utility described the decision as “disappointing”, but said it was instead advancing talks with “certain senior creditors” on an alternative plan to recapitalise the business. It will also engage in discussions with regulator Ofwat regarding the senior creditors’ plan. KKR’s withdrawal raises the possibility of a temporary government nationalisation of Thames Water once again, should it fail to secure a rescue deal.
Expert Russ Mould, investment director at AJ Bell, said: “Mere days after the UK government closed the final chapter on its banking sector bailout by selling its remaining stake in NatWest, it’s now the turn of the utility sector to be rescued. It looks increasingly like Thames Water will have to be renationalised, after US private equity firm KKR pulled out of plans to inject £4 billion into the business.
“KKR’s U-turn is a surprise, given its investment seemed like a done deal. The government indicated all through the fundraising process that it was ready to step in and take over Thames Water if necessary.
“If this does happen, it would represent a soggy end to what’s been a failed privatisation. Thames Water has been like a sponge, soaking up debt and getting into a financial mess.”
Environment Secretary Steve Reed stated “Thames itself remains stable”, but added: “The Government is clearly keeping a very close eye on what’s going on.” Mr Reed informed LBC Radio: “We’re monitoring the situation, but there’s no disruption to water supply. Thames have got a number of options that they’re exploring.”
He mentioned that “as things stand” Thames Water is “a stable, ongoing company” but the Government was “ready for any eventuality”. “If the circumstances happened with any company, any water company, where there was a breach and it would need to be put into special administration, that would happen but, as things stand, that’s not applying to any company right now,” Mr Reed clarified.
The move by KKR tails an interim report published on Tuesday by the Independent Water Commission, which called for a “fundamental reset” in England and Wales’ water sector, urging “strengthening and rebalancing” of Ofwat’s regulatory role towards more supervisory oversight.
Sir Adrian Montague, chair of Thames Water, admitted: “Whilst today’s news is disappointing, we continue to believe that a sustainable recapitalisation of the company is in the best interests of all stakeholders and continue to work with our creditors and stakeholders to achieve that goal.” Montague also confirmed: “The company will therefore progress discussions on the senior creditors’ plan with Ofwat and other stakeholders.”
Additionally, he expressed gratitude stating: “The board would like to thank the senior creditors for their continuing support.” No comments have come from KKR on the matter.
Thames Water’s backup plans
It’s reported that Thames Water is swiftly moving forward with its backup plans alongside its senior creditors. These creditors are the bondholders who in essence own Thames Water after the High Court sanctioned a financial restructuring earlier this year, allowing a loan of up to £3 billion for the firm to maintain operations until at least the summer of 2026.
Thames Water, saddled with a staggering debt of about £19 billion, was reportedly on the brink of bankruptcy earlier this year, with only about five weeks’ worth of cash left. This dire situation was averted when it secured a £3 billion loan deal, effectively preventing it from being renationalised and falling under Government control.
However, the company still requires substantial ongoing financial support to stabilise its finances for the long term. In March, Thames Water announced that it would continue negotiations with senior creditors on an alternative transaction, as there was no guarantee of finalising a deal with KKR.
The water giant faced additional strain last week when it was slapped with a record-breaking £122.7 million fine by Ofwat for violating rules regarding sewage treatment and dividend payouts. Earlier in May, Thames Water’s chief executive Chris Weston warned MPs that excessive fines could deter new investment into the company.
It is believed that the water sector as a whole needs significant reform to attract new investment. Water companies have been at the receiving end of public and political fury over pollution issues, escalating bills, hefty dividends, and exorbitant executive pay and bonuses.
Adding fuel to the fire, Thames increased consumer water bills by an average of 31% in April and sparked further outrage with plans to award senior bosses large bonuses linked to the water company securing a £3 billion emergency loan. The proposals were scrapped following Sir Adrian’s admission that he had mistakenly claimed the contentious retention plan was “insisted upon” by the firm’s lenders.
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