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In a game of chicken, the first player to flinch loses. In the stand-off that has been playing out this year between Thames Water on the one side and regulator Ofwat and UK ministers on the other, the latter might be feeling triumphant. But they shouldn’t celebrate too soon.
They have been pushing Thames, which had warned in September it could run out of cash by the end of the year, to find a market-led solution to its troubles. That now looks like a distinct possibility. Provided there are no objections, Thames should in January receive approval for a £3bn emergency loan from creditors, giving it enough cash until at least next October, and potentially until May 2026.
Thames has also started a process to find new equity investors. This should precipitate a capital restructuring. Although the success of a capital raising still hangs on a five-year regulatory settlement with Ofwat — due to be published next week — it should rule out renationalisation. But at what cost?
Sir Dieter Helm, the Oxford University professor who has previously advised the government on infrastructure, warned in a paper this week against applying “endless sticky plasters” to Thames Water. He believes ministers should temporarily take over and restructure Britain’s biggest privatised water utility. The alternative is a “slow death” if new owners once again fail to sufficiently invest in infrastructure and run the company efficiently.
He is right to be cautious. If history is any guide, new owners often kick the can down the road. Thames is in this predicament for several reasons. But chief among them is financial engineering and insufficient investment by previous owners.
So far there are relatively few details about what potential new equity investors might do with Thames. Covalis, if its bid succeeds, would look to sell off assets before publicly listing the rump. Thames is, indeed, too unwieldy under its current structure. But if not careful, this could feel like a fire sale. As Helm implies, there are justifiable questions over whether a similar process might be better handled as part of a temporary nationalisation.
What is clear is that already Thames is wracking up a hefty bill to work out its endgame. The £3bn emergency loan comes with a headline interest rate of 9.75 per cent. Thames’ half-year results on Tuesday revealed more than £50mn of spending linked to restructuring and engaging with creditors — for which read a nice pay day for advisers.
Ministers and the regulator might be nearing victory in this first round of chicken. Ultimately, though, they might find a market-led solution is not all it cracks up to be.
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