The group is expected to run out of liquidity in May 2025 based on its current funding plans. Whilst there may be earlier ‘trigger events’ and/or events of default under the group’s whole business securitisation structure (WBS), we understand that this (i.e., cash flow insolvency) would probably be the most likely trigger for a special administration regime (SAR), given we understand there is a reticence on the part of Ofwat / the government to put the business into a SAR short of that (e.g. for a licence breach).

The interim financing would allow the company to extend its liquidity runway and therefore both push out the risk of a SAR filing and the timeframe for finding new equity investors. The sources added that if an equity investor is not found then they are willing to come up with a creditor-led solution to avoid impairing their recoveries under a SAR. These may involve share pledge enforcements — potentially at the Kemble holdco level or within the WBS group (we will go into more detail on these potential options in a legal options piece next week).

The large creditor group, advised by Jefferies and Akin Gump, holds over £8bn of Thames’ £16bn of WBS debt. The majority of the debt held in the group is Class A, one of the sources said.

“There is appetite from people in the group to provide new money…it’s in the WBS creditors’ interest,” the second source familiar said. “These are serious institutions with deep pockets.”

The Jefferies/Akin group is run by a SteerCo consisting of BlackRock, Elliott, Invesco, MetLife, Abrdn, Anchorage Capital, Corebridge Financial, D.E. Shaw, Insight Investment, M&G, Pricoa Private Capital, Sona Asset Management,Assured Guaranty and Voya Investment Management. The list of funds was initially reported by Bloomberg on 26 July but has been confirmed by the sources.

The incentive of the creditors to stump up the funding would be to maximise their recoveries and avoid a haircut on their debt. But other sources were skeptical of the willingness of incoming or existing equity investors to fund the business without haircuts to the WBS, given the low levels of return on investment implied by UK water regulator Ofwat’s response to Thames’ business plan. There are also several hurdles that would complicate a consensual deal and necessitate the use of a legal process to restructure the business (e.g. a scheme of arrangement or a restructuring plan), which could lead to an impairment of their debt.

The size of the company’s new money need (generally, under their new business plan, but also for the purposes of this interim financing) will depend on a number of things, including the group’s revised business plan, which is due on 28 August.

Any potential equity investor is going to want line of sight on any further concessions Ofwat are willing to provide — which can only be known when the regulator publishes its final determination on 19 December — before they make an investment Thames will naturally need more time to find an investor beyond December, the sources said.

Back to the drawing board

Yesterday, 1 August, the Jefferies/Akin group held a call to go through Ofwat’s draft determination decision on Thames’ five year business plan last month.

Ofwat branded the business plan, which involved raising tariffs by 43%, as “inadequate” and announced its intention to place the company in a “Turnaround Oversight Regime”. Thames has until 28 August to address the regulator’s concerns with an amended plan, but it remains to be seen whether the group can pull together a plan off the back of Ofwat’s pricing proposals which can provide sufficiently tempting returns for equity investors.

An Ofwat spokesperson told 9fin: "The fundamental issues are clear – as the company itself has noted, it must secure new equity from investors and improve its operational performance. We have safeguards to protect customers regardless of the financing issues the company faces."

Thames’ plan was submitted back in October, and envisioned shareholders pumping in an additional £3.25bn of equity over the next five years, with £750m coming in this financial period and £2.5bn coming in over the 2025-2030 period. That, alongside tariff raises, would have gone towards a massive increase in expenditure (£18.7bn) over the new period and netted equity returns of 7.8%.

The plan also outlined that the company planned to spend £10bn in capex over the five year period. Sources familiar said 65-70% of capex is usually funded by the debt capital markets depending on leverage, which means the company would require £6.5-£7bn of debt. The company would struggle to raise new financing in the market outside of its existing creditor group given its recent downgrade to junk status.

The negative feedback from the regulator regarding Thames’ business plan led existing shareholders to walk awayfrom Thames Water back in March. Thames Water said in an announcement from the time that the conditions imposed on equity investors did not represent an “investable proposition”.

OMERS, Thames’s largest shareholder with 31.77% of its equity, has entirely written off its investment, according to a report from Infrastructure Investor.

There is also a group of banks holding the loans in the WBS structure that are being advised by A&O Shearman and Perella Weinberg. Thames Opco is being advised by Rothschild and Linklaters.

Downgrade opens floodgates

Since the water company was downgraded by Moody’s on 24 July to junk status there’s been a flurry of lenders looking to offload their debt, the sources said. S&P also downgraded the name a week later.

The downgrades have triggered a breach of licence requirements for the company to maintain an investment grade rating, triggering a cash lock-up (i.e. no dividends etc may be paid out). The company has asked Ofwat to look at undertakings to remedy the recent licence breach related to credit ratings and restore financial resilience following the downgrade, according to a source close. The regulator is actively considering these, the source added.

If their debt falls into the hands of the creditors in the larger group then the two creditor groups could end up folding into one, one of the sources said. The group has already been growing in size since the downgrade, they added.

Creditors in the debt at Holdco level (Kemble), which has been in default since April, is being advised by Freshfieldsand Moelis. Kemble is being advised by Alvarez & Marsal.

Thames Water declined to comment. 9fin approached the UK government for comment.

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