Thames Water Ltd. said it needs “significant additional funding” in the years ahead to service its debts and fix leaky pipes, even as investors agreed to put an extra £750 million ($960.4 million) into Britain’s biggest water utility.
(Bloomberg) — Thames Water Ltd. said it needs “significant additional funding” in the years ahead to service its debts and fix leaky pipes, even as investors agreed to put an extra £750 million ($960.4 million) into Britain’s biggest water utility.
Bonds rebounded on Monday morning after the company released details of the emergency funding, which is short of the £1 billion it had been trying to raise.
It later told debt investors during an afternoon call that it has the support of all shareholders — as long as they approve its business plan — according to people familiar with the situation. Thames representatives said on the call that they were confident of raising a further £2.5 billion in the five years to 2030, the people added.
“They’ve bought some time, but they are not out of the woods yet,” said Johnathan Owen, a portfolio manager at TwentyFour Asset Management in London. He said the company wanted regulators to allow higher returns in order to attract the necessary equity.
Thames Water, which serves about a quarter of the UK population, has been at the center of a crisis in the sector as rising interest rates drive up payments on inflation-linked debt. Regulators are expected to demand more investment into Britain’s water infrastructure which suffers from chronic leaks and frequent over-spills of raw sewage into rivers and seas, raising questions about the merits of privatization.
“For now, it’s kicked into long grass,” said Luke Hickmore, investment director at Abrdn Plc, who holds Thames Water secured bonds. He said the funding package, alongside the company’s cash generation, “may well be enough as it is.”
However, Susannah Streeter from retail trading platform Hargreaves Lansdown said the £750 million “is very much an emergency pumping operation, rather than shoring up Thames Water’s finances for the longer-term.”
A £400 million junk-rated bond issued by Thames Water’s holding company jumped almost 9 pence on the pound to 68.7 pence as of 3:41 p.m. in London, but remained well below levels prevailing two weeks ago. A €650 million ($712 million) 2027-dated bond by the operating company rose 1.8 cents to 94.7 cents on the euro.
The utility has held talks with government officials and regulators over contingency plans — including a possible temporary nationalization — but the government believes public ownership can be avoided, people familiar with the matter said last week.
Interim Chief Executive Officer Cathryn Ross told the BBC on Monday that Thames Water had £4.4 billion in liquidity which would be “absolutely enough to pay everything that we think we need to pay this year next year and into the future.” She said the company is “absolutely not close” to falling into public ownership.
Read More: UK Government Believes Thames Water Can Avoid State Takeover
The agreed investment “looks sufficient to shore up the balance sheet,” said Paul Vickars, a credit analyst at Bloomberg Intelligence. “Thames Water should be able to avoid being placed into a special administration regime.”
However, the company will need to raise more debt to invest in infrastructure, keeping gearing under pressure.
The firm’s net financing costs climbed 24% in a year due to higher borrowing to fund investments and the impact of inflation, which drove up its index-linked debt. Statutory net debt has jumped to almost £14 billion, up more than £1 billion year-on-year. Gearing fell to 77.4%, according to the company.
“With inflation and high interest rates set to linger for longer, the cost of servicing debt for water companies will remain expensive,” Streeter added.
QuickTake Explainer: Thames Water Is Drowning in Debt. What Went Wrong?
The equity funding comes almost two weeks after Chief Executive Officer Sarah Bentley abruptly quit. Two days later, city veteran Adrian Montague was appointed chairman. Lawmakers are due to question present and former executives — along with representatives of the regulator Ofwat — over the firm’s financial resilience on July 12.
Thames Water incurred £82 million in annual penalties from Ofwat due to poor performance, £50 million more than a year earlier. The company blamed “extreme weather and aging assets” for operational issues.
–With assistance from Tasos Vossos.
(Updates with detail from the investor call.)
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