Following the surprise resignation of Thames Water’s Chief Executive, Sarah Bentley, on Tuesday, and subsequent reports of crisis talks over the company’s £14 billion debt burden, a Senior Credit Analyst at Bloomberg Intelligence has commented on what effect a special administration regime, if imposed by Ofwat, might have on the debt.
Paul Vickars, Senior Credit Analyst at Bloomberg Intelligence said:
“Thames Water risks being placed into a special administration regime by the UK regulator. This is due to pressure on its ability to service a £14 billion debt burden that accounts for 80% of its regulatory capital value, a poor performance on water leaks and sewage contamination that’s led to repeated fines, and the strategic void left by the resignation of its CEO. This coincides with a trough in its covenant headroom to about £500 million in mid-2023 that limits financial flexibility, unless shareholders can be convinced to provide the extra £1 billion of equity funding envisaged in the most recent business plan. A special administration regime would facilitate a transfer to new owners but leave ring-fenced bondholders unable to enforce any security and with no guarantee of being made whole in a new financial structure.
“If Thames Water enters a special administration regime, finding a new owner may require a haircut of up to 25% on the nominal value of the ring-fenced debt. We calculate that this would reduce regulatory gearing to the notional 60% set by Ofwat to enable a company to finance its operations at high grade level – which would be a reasonable stipulation for a new owner. Even in the unlikely event that the Class B debt was fully written off, the priority Class A debt would still need a haircut of 15% to bring regulatory gearing down to 60%. Based on the 55% notional gearing that Ofwat intends to apply for the 2025-30 regulatory period, the necessary haircut across all ring-fenced debt would have to be increased to 30%. If a new owner were to accept the sector average of around 65% gearing, the haircut would only fall to 20%.
“The risk of Thames Water being placed into a special administration regime is most acute for bonds outside of the securitization ring-fenced group, namely the £400 million 4.625% 2026 bond from Thames Water Kemble Finance Plc that has fallen by 35 points to a price of about 50. The Class B second-lien instruments within the ring-fenced group look to be next in line, though by some distance, with the £250 million 2.875% 2027 bond from Thames Water Utilities Finance Plc down by 4 points to a price of 79.”
