Senior Credit Analyst at Bloomberg Intelligence discusses what effect a special administration regime might have on Thames Water’s debt
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.”