The news of Thames Water’s financial position and possible “Special Administration” should not harm customers of Thames, or Castle Water’s customers who receive services via the Thames Water network. The purpose of the Special Administration regime is to protect the operation of a network, and customer interests, in the event of a weakening financial position. I would also note that there is no direct impact on water retailers such as Castle Water, and customers benefit from the separation of activity between Thames Water and Castle Water who are entirely independent of each other.
Ofwat has published a statement on “financial resilience (29 June 2023), which shows that Thames has over £4.4 billion of cash available to carry out its functions:
Thames Water has a financing structure specifically aimed at maximising leverage (debt) while maintaining an investment grade credit rating, Whole Business Securitisation (WBS). This normally gives a low interest rate which helps keep bills down but is very inflexible in the event of major changes to other parts of a financing position. Some parts of the debt are indexed to RPI. My view for some time (I have been raising questions about WBS for over 20 years) has been that a WBS is too inflexible to be suitable for such long-term financing and relies too much on an implicit government guarantee; the problem with the inflexibility is increased by the impact of increasing RPI. Thames Water is not alone in this – WBS structures are common among the water networks, as is RPI-linked financing.
There is sometimes a feasible prospect of a debt restructuring where a company is over-leveraged but otherwise has a viable business model – so why hasn’t this been possible here? Resolution can involve a debt for equity swap, and renegotiation of debt terms. With a WBS, a debt restructuring can take c. 2 years, given the complex ownership and structure of multiple levels of debt, and the different legal position of the owners of each type of debt. The relatively rapid increase in RPI may have wrong-footed Thames and made a restructuring difficult to achieve; shareholders are not supportive of accepting a major reduction in their equity holding if they think other routes may be open (e.g., Government support).
To me, it has always been clear that both WBS and a reliance on selling index-linked debt were dangerous, and questionable. If Thames avoids Special Administration, I expect Ofwat to be paying very careful attention to ensure that the Board of Thames puts the resources in place to carry out its obligations. In the event of a Special Administration, the cash lock-up on Thames is designed to make sure customers and service provision do not deteriorate.
However, there are still problems which will be caused by a special Administration which Ofwat needs to ensure are dealt with urgently.
I have concerns over the extent to which Ofwat, MOSL (the market operator) and the Panel (who are responsible for the market Codes) have understood the impact of a Special Administration. I have told Ofwat that they and the Panel need to urgently review the Codes to ensure they operate correctly if there is a Special Administration and asked to see their urgent work plan to complete the review and implement any changes. I am particularly concerned about how they will ensure that cash payments due to be made via Castle to customers where there are retrospective amendments to Thames’ wholesale charges (which can go back for several years), will be made and made promptly.
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