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The UK environment secretary has “stepped up” preparations to plunge Thames Water into special administration as he signalled he would reject demands from the ailing company’s creditors to exempt it from key environmental laws.
The creditors — who are seeking to take control of Thames through a £5bn rescue — are demanding that the government and regulator Ofwat grant licence changes and even emergency legislation to shield the business from laws as a condition of their bid, according to documents seen by the Financial Times.
The bondholders said their “core requirement” to take on Thames was for the government to provide “clear and unambiguous direction to implement the above detailed compliance derogations and enforcement adjustments”.
But environment secretary Steve Reed told the House of Commons on Thursday that there would be no special treatment for the UK’s largest water company, which is struggling under a near-£20bn debt mountain.
“Thames Water must meet its statutory and regulatory obligations to their customers and to the environment,” he told MPs.
“It is only right that the company is subject to the same consequences as any other water company. The company remains financially stable, but we’ve stepped up our preparations and stand ready for all eventualities, as I’ve said before, including special administration regime if that were to become necessary.”
Reed’s comments marked a hardening of the government’s language in relation to the possibility of Thames going into the government’s special administration regime, or SAR, a form of temporary nationalisation.
The minister spoke after the FT reported that Thames’s creditors, who are providing a back-up rescue of the utility, were demanding waivers that would exempt the company from key environmental laws.
Thames Water and the creditors were contacted for a response to Reed’s comments.
The senior creditors’ plan is the only one on the table after US private equity firm KKR this month walked away from its own bid to rescue Thames.
One person familiar with the creditors’ position said: “Without regulatory support, customers will remain exposed to the risk of a continued doom loop of underperformance, and the business is simply not investable if there is no route to improvement.”
Ofwat is currently assessing the plan by the creditor group, which comprises more than 100 financial institutions that are owed £13bn by the utility. The group has already agreed a £3bn emergency loan to the beleaguered water company, which is trying to avoid renationalisation as it struggles with a near-£20bn debt mountain.
These lenders, which include the hedge funds Elliott Management and Silver Point, are now proposing to inject £3bn of equity into Thames, extend £2bn of fresh debt, and take a 20 per cent writedown on the value of their existing loans in exchange for taking formal control of the utility.
The creditors assess that Thames has a “clear, deep-rooted environmental non-compliance gap” that will expose it to more legal action and regulatory investigations, reads the document sent to government and regulators.
They also want fines removed, including those already imposed — such as a £104mn penalty for failing to manage its sewage treatment works adequately, as well as an £18.2mn fine for paying “excessive” dividends.
The creditors are also asking for changes to Thames’s licence, which would provide added protection against Ofwat fines and penalties and would allow them to raise prices at any time before 2030.
A creditor spokesman said the “plan submitted to Ofwat can be delivered without increasing customer bills above those set by the Final Determination for the five-year period to 31 March 2030”.
The spokesperson added: “Broad regulatory support is needed to unlock a market-led solution for Thames Water that will secure billions of pounds in fresh investment for its ageing network.”
The creditor plan is also facing mounting opposition from rival creditors and environmentalists, who are calling for the company to be temporarily renationalised.
Charlie Maynard, the Liberal Democrat MP who mounted a legal challenge to the initial £3bn loan, is seeking a further appeal to the Supreme Court, which could be heard in the early autumn.
Thames Water said: “In order to be investable, we and prospective investors would need to engage in discussions with our regulators. We remain focused on securing a market-led solution to restoring Thames Water to financial health.”
Ofwat said: “We have commenced a thorough review of the submission from the group of senior creditors. Our focus is on assessing whether the plans are realistic, deliverable and will bring substantial benefits for customers and the environment.”
