Investors in troubled UK utility Thames Water Ltd. have agreed to put in an extra £750 million ($960.4 million) of emergency funding, reassuring debt markets for now.
(Bloomberg) — Investors in troubled UK utility Thames Water Ltd. have agreed to put in an extra £750 million ($960.4 million) of emergency funding, reassuring debt markets for now.
The equity injection is less than the £1 billion the company had been trying to raise, and a further £2.5 billion is needed in the five years to 2030 to push through a crucial turnaround plan. But Thames Water bonds rose Monday on signs that the firm can avoid a takeover by the state.
Britain’s largest water utility, which serves about a quarter of the population, has been at the center of a crisis in the sector as rising interest rates drive up payments on inflation-linked debt. The industry is under scrutiny as it’s failed to invest enough in infrastructure to keep sewage out of the sea and rivers, and mounting debts have raised 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. “With the cash generation they have, the extra £750 million now and the potential £2.5 billion later may well be enough as it is contingent on the company continuing to make targets, which it has been doing more recently.”
A £400 million junk-rated bond issued by Thames Water’s holding company jumped around 8 pence on the pound to 68 pence on Monday, but remained well below levels prevailing two weeks ago. A €650 million ($712 million) 2027-dated bond by the operating company rose 1.7 cents to 94.6 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.
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.
“This is very much an emergency pumping operation, rather than shoring up Thames Water’s finances for the longer-term,” said Susannah Streeter, head of money and markets at investment platform Hargreaves Lansdown Plc. “With inflation and high interest rates set to linger for longer, the cost of servicing debt for water companies will remain expensive.”
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 and Priscila Azevedo Rocha.
(Updates with Hargreaves Lansdown comments in 10th paragraph.)
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