Thames Water seeks court approval for emergency cash

Thames Water, facing a cash crunch within four weeks, will apply to the court on Monday for emergency cash assistance. The heavily indebted company’s creditors are offering up to £3 billion in short-term loans to buy time to complete a major restructuring of Britain’s largest water and waste company.

If approval is not granted, Thames Water will move closer to temporary nationalization, which could cost the government around £2 billion per year. The company is still considering whether to appeal a decision by regulator Ofwat, which allowed it to raise bills by up to 35% above inflation over the next five years, lower than the 53% increase it had requested.

Thames Water’s financial troubles were apparent as early as 18 months ago, when the company began seeking funds to avoid collapse. The company has been heavily criticized for a series of sewage discharges and leaks, and its poor financial situation is the result of a combination of historical regulatory failures, shareholder greed, climate change, and management failures, with current debts totaling around £17 billion.

To stay afloat, lenders have offered Thames Water up to £3 billion in additional loans, to be paid in two tranches. The first payment is to maintain operations until the autumn, and the second is for use if the company decides to appeal Ofwat’s 35% bill increase to the Competition and Markets Authority (CMA), a process that could take up to a year. The company has until February 18th to file an appeal with the CMA. Investment bank Rothschild is also soliciting bids for the company to inject much-needed funds.

The court hearing on Monday is expected to last four days and could be extended, as a small group of lenders are challenging the terms of the bailout and proposing alternatives. Although Thames Water would not immediately collapse if the judge does not approve the deal, insiders admit that a failure would bring the company closer to temporary nationalization, known as special administration. The government has already issued consultations to several advisory firms to take over in the event this occurs.

The company has emphasized that its service to 16 million customers will not be interrupted, no matter what happens, but questions have arisen about the future of Thames Water and other critical infrastructure providers. Some argue that Thames Water should be allowed to go bankrupt and be taken over by the government, as it is the author of its own misfortune. Previous owners loaded the company with debt, extracted huge dividends, and paid executives lavishly. To now yield to its demands that customers pay more for failing services would be a great injustice.

Others argue that poor regulation has led to this mess. Bills have long been kept too low, which has discouraged investment in aging infrastructure that is now being overwhelmed by an increasingly wet climate. Ofwat is fighting yesterday’s battle and making things worse by imposing tens of millions of pounds in fines for failures, further depriving the company of funds to fix the projects it has been penalized for.

Both Thames Water and ministers agree that neither of them want the massive company on the government’s books. Consultancy Teneo has predicted that temporary nationalization would cost up to £2 billion per year. However, a broader and perhaps more important argument raised by some is that the failure of Thames Water as a private company would send a damaging message to international investors that Chancellor Rachel Reeves hopes will invest in UK airports, wind farms, rail connections, and all the other growth-boosting projects.

Sources close to the company and its creditors believe that we cannot dwell and regulate on past mistakes. We are now in a difficult situation. A special deal for Thames Water must be worked out, or there is a risk of bankruptcy. Thames Water has just over two weeks to appeal to the CMA to increase the amount it is allowed to charge for bills. This is not without risk, and the CMA could lower it.

Last week, the chair of the CMA was removed from his post because ministers were unhappy with his regulator’s focus on growth. Thames Water says it needs higher bills to invest £20 billion over the next five years. This will be an interesting test for the new chair.