Thames Water 1H25: Naughty or Nice?

• Given precedents like Casino and Altice, we expect the Class A creditors to maintain a firm grip on the Thames rudder in order to keep wannabe equity investors safely downstream until the Class As are sure they are the ones now steering the barge. This of course assumes things do not spiral SAR-ward given a list of potential water-logging impediments which while not the base case, are not negligible either.
• Still, we are encouraged that equity wannabes exist given that the equity investment case is structurally underwhelming. How real any of the equity interest is and at what valuation, we will leave to 2025 and all that that happy new year has to bring.
• How underwhelming (and given the Ofwat WACC inputs, ‘not underwhelming’ is off the table) depends mainly on the events of 19 December, and subsequent appeals which are to be facilitated by the proposed Liquidity Extension Transaction (LET). A Thames appeal post FD would mark a departure from Thames’ acceptance of Ofwat FDs in recent AMPs and some might say, is rather overdue. […]

Relative Value

While headlines around equity interest in Thames make for interesting reading, and of course, some equity interest is better for bond prices than no equity interest, we can probably put this to one side for some time yet. Until a recapitalisation deal is hashed out, and then set in court-blessed stone, the expressions of interest are merely informative rather than truly price sensitive.

The Thames 1H25 accounts were notable for both the liquidity delta and the increase in fully loaded FCF negative to -£642 mn for the half year (after interest paid in the period of £209 mn, but not including the £87 mn interest received). New drawings of £1,167 mn were mainly from Class A RCF drawdowns. Unsurprisingly, the accounts come with material uncertainty language given the lack of committed liquidity for twelve months forward.