Thames Water may need as much as £10bn in debt and equity investment to repair its finances, according to a representative of creditors hoping to lend the struggling utility another £3bn.
London’s high court heard evidence on Tuesday that suggested the UK’s largest water company may need significantly more resources than the roughly £6.3bn it has previously indicated.
The testimony underlines the extent of the water firm’s financial difficulties as it asks the court to approve the emergency funding to help it stave off the threat of temporary nationalisation.
Thames is on the verge of a collapse that would force the government to take control under a special administration regime in order to maintain the supply of water and sewage services to 16m homes and businesses in London and south-east England – almost a quarter of the UK population.
The court heard on Tuesday that Thames Water will end up paying £200m to advisers in the first half of this year, according to the chief financial officer, Alastair Cochran, although he added that those costs would be borne by creditors rather than customers. Those include the investment bank Rothschild, which is seeking a new buyer, and the law firm Linklaters.
The funding crisis has put pressure on the government to go ahead with a temporary nationalisation, amid complaints over steep bill increases and widespread outrage over sewage flowing into Britain’s rivers and seas.
Thames said last summer that under one scenario it might need £3.3bn in equity, separate to the £3bn in debt being decided in court. However, other experts have said they believe it will need significantly more cash to put it on to a solid footing.
A packed courtroom on Tuesday heard evidence supporting that from David Burlison, a restructuring expert at the investment bank Jefferies, who advises the holders of much of Thames. He said: “The business is going to need a recapitalisation somewhere in the region of £6bn to £10bn.”
The £10bn might stretch to a wide range of things, including money to cover unexpected costs, regulatory fines, plus enough new capital to cut down the company’s debt pile to a level that is acceptable to regulators and bond rating agencies.
Julian Gething, Thames Water’s chief restructuring officer, said: “Any recapitalisation of Thames Water will need to deliver an investment-grade credit rating to meet regulatory requirements and enable us to continue investing the billions of pounds required to improve our network’s resilience for the benefit of its customers.”
The court is due to decide whether to approve up to £3bn in emergency debt funding. Thames Water has said that it will run out of cash at the end of March if it does not receive the money from about 100 big investors, represented by Burlison, who already hold class A debt.
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The class A group includes significant investors across UK infrastructure, some of whom could bid for ownership of Thames at a later point. This is something that has been emphasised in lobbying of Ofwat and the government, according to people familiar with talks.
The suggestion is that tough writedowns could drive up investment costs for all UK water and non-water infrastructure, if the risk profile of UK assets changes as a result of the handling of Thames. Others have argued that this risk of wider contagion has been overplayed.
The class A investors are lined up against holders of class B debt who argue their deal is cheaper, but that the class A investors are trying to control Thames for their benefit. However, the company accused the class B investors of a “shambolic” approach that would not be viable, in written submissions to the court on Monday.
There are billions of pounds at stake in the hearing. An independent report for the court by Teneo, a consultancy, estimated last month that class A investors stand to lose £5bn if the company enters special administration, compared with £2.8bn even if the deal goes through.
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