Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The Treasury is seeking greater clarity on the cost of renationalising Thames Water ahead of a crucial court judgment this week that could decide the future of Britain’s largest water supplier.
Thames Water, which provides water and sewage services to about a quarter of the UK’s population, is on a knife edge, with a key decision on Tuesday about whether a judge will approve an emergency £3bn loan from creditors to buy the indebted utility time to raise equity and restructure its finances.
If judges reject the plan, Thames Water is widely expected to be catapulted into the special administration regime, an unprecedented temporary renationalisation of a water company.
The Treasury is seeking clarity on the impact of a SAR on the government’s finances ahead of the Spring Statement at the end of March, two sources close to the process said.
The Spring Statement will include an “economic and fiscal forecast” put forward by the Office for Budget Responsibility which is expected to show a deterioration in the public finances.
People familiar with the situation suggested the government had been loath to clarify the potential costs of Thames Water entering a SAR because it is opposed to renationalisation. It is concerned that a SAR would have a domino effect on other indebted water companies and that some Labour MPs would argue for the utility to remain permanently renationalised. It is also concerned about the effect on the government’s balance sheet, even if short term, of the utility’s infrastructure backlog.
But Tom Astle, global head of restructuring at law firm Hogan Lovells, said the utility should continue to operate and receive income from customers under the SAR and Thames Water could even be “cash flow positive in that window”.
Debt payments would be frozen, freeing up additional cash, potentially for operational improvements and investment in the infrastructure, he added.
“Although the government may need to provide some sort of interim funding to Thames Water, if no private provider does, it’s likely to be repaid first in any restructuring of the business either during SAR or when the business is sold to new investors,” he said.
The push for greater clarity on costs follows criticism of the government and regulator Ofwat earlier this month by the judge presiding over the court hearing into whether the £3bn loan should be approved.
Mr Justice Leech said that the lack of engagement in proceedings from water regulator Ofwat and the government was “unfortunate”.
The proposed £3bn loan from class A creditors, which include the US hedge funds Elliott Management and Silver Point, carries a 9.75 per cent interest rate, as well as fees. It has been opposed in court by a different group of creditors, who stand to lose nearly all their money under the deal and have put forward their own slightly cheaper loan.
Environmentalists led by the Liberal Democrat MP Charlie Maynard, represented by William Day, a barrister acting pro bono, also opposed the loan in court on the grounds that it was not in the interests of Thames Water’s 16mn customers. Just a third of the emergency loan’s proceeds would reach the utility after payments and other costs, Maynard says. The company is burning through £15mn a month on legal and advisory fees.
On Friday Thames Water said it was planning to appeal to the Competition and Market Authority for even higher price increases for customers even though annual bills are already scheduled to rise by a third to an average £639 per household in April. Half of the creditors’ £3bn loan was conditional on a CMA challenge and still needs to be fully agreed with lenders.
A government spokesperson said: “The company remains stable and as a responsible government we are prepared for a range of scenarios across our regulated industries.”
Credit: Source link
