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Thames Water: Haircut 100?
Andrew Moulder - Head of Utilities
Helen Rodriguez - Head of European Special Situations
EXECUTIVE SUMMARY
- There are few certainties about how the Thames credit story will play out, but one ‘known’ is that the desired public outcome is for a cleaned up and efficient version of Thames to emerge in due course, and another is that Thames will become an election-slogan political football.
- Whether there are enough ‘sins of the father’ idiosyncrasies about the Thames’ story to allow the government of the day to walk on by while Thames sinks, is however, still in unknown territory.
- There is a fearsome set of near-term triggers that are knowable, but hard to call; these include FY24 accounts sign-off, rating agency actions (and the risk of sub-IG), market access for debt refinancing, enforcement of the Kemble default, and the final outcome of the shareholder rebellion.
- In the background, there are also discussion about PR24, with a longer term timeframe that could potentially run into 2026 if Thames decides to refer the final determination to the CMA and needs to wait for its final decision.
- The biggest unknown however is precisely how to clean Thames up, both operationally in terms of its efficiency and KPIs, but more urgently, how to fix its balance sheet given that it is currently trapped between a regulatory rock and the shareholder return hard place.
- One possibility is that Thames might need to be sold to a third party; we take a look at allowed returns and valuations in the sector.
- We are also considering possible write down scenarios either because stakeholders decide to act proactively to achieve the de-leveraging that the regulator has indicated, or because a special administrator takes charge and deploys the appropriate restructuring tool to achieve the same.
- There are scenarios under which Thames bondholders might see a full recovery, but there are a lot of scenarios under which they might not and the predilection of the government in this regard is not certain.
Anyone minded to spend an afternoon enjoying a heated debate could find ample subject matter at Thames:
- Does Thames still have market access, and if so, with what terms?
- Who needs to blink first in the stand-off between the regulator and the shareholders?
- How should Kemble be solved?
- Will the UK government allow the Class As to take a haircut?
- Will the UK government make the Class As take a haircut?
- Who should drive the restructuring process if not the government?
- Will Thames get SAR’d?
- Will Thames get nationalised?
While there is a pre-election base case that revolves around a partial climbdown from the regulator, ‘encouraged’ by the government with one eye on the polling booth, allowing the current shareholders to come back to the table, there are numerous potential triggers for a credit spiral. These include, but are not limited to: FY24 accounts sign-off, rating agency actions and the risk of sub-IG, another public blow-up with shareholders, any shock around environmental KPIs, and political machinations particularly from government.
LIQUIDITY CONCERNS
Even if Thames navigates all of these potential catalysts, there is also the crucial question of liquidity. We took the comment made on the conference call that the £2.4 bn of liquidity could last for 15 months to mean that this assumes no access to refinance debt in the capital markets, but full access to its liquidity lines. Over the next 15 months, to mid 2025, we calculate Thames has just under £1 bn of maturities (bonds and loans).
In a scenario where Thames has lost bond market access during this current period of uncertainty, we calculate that it has a funding need of about £2 bn between the end of 2024 and the end of FY27 (31 March 2027) to meet upcoming maturities (bonds and loans).
Thames’ PR24 business plan assumes gross issuance, for refinancing and funding investments of £4.7 bn between FY24 and FY27, of which some £3 bn is debt refinancing and the remaining £1.7 bn would be for investments. For 24/25 and 25/26 the amount for investments is ~£610 mn. Of course, how significant investment requirements might be will depend on the what is approved in the business plan, and also how Thames might choose to phase those investments over the next regulatory period. After getting some initial feed back from Ofwat on the business plan, which led to the shareholders saying that the Ofwat demands made the company “uninvestible”, Thames is reportedly preparing a new plan which is expected to be published on Friday 19 April 2024.
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