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Plumbers only sleep on the job when paid by the hour, cartoon plumber Mario once quipped. The bosses of Thames Water appear to have been napping more persistently. The overleveraged business is going down the drain. Incoming chair Adrian Montague should ready a plan for a debt-for-equity swap.
Thames’s costs are rising faster than customer bills due to a quirk of indexation. Some £14bn in debts contracted by the regulated business are linked to the retail price index. Revenues track the more slowly rising consumer price index.
Thames is left even more boxed in by its financing structure: a “whole business securitisation” created by previous owner Macquarie.
The regulated company’s debts sit within the covenant-heavy arrangement. This gives creditors hefty protection. Refinancings are prohibitively costly for example.
In theory, steep leverage can then coexist with investment grade credit ratings. Incredibly, even after being downgraded last year, some £12bn of Thames debt still carries a BBB- rating.
Yields on these notes have ticked up, but not as they have for £1.5bn or so of bonds outside the securitisation. Yields on the £400mn of Thames Water (Kemble) Finance Ltd 2026 notes, for example, have exploded higher this week.
Features of the securitisation bonds may be enough to deter further investment. A proportion of index-linked interest is added on to the principal of some bonds. It is only due to be paid off at maturity. That will continue to push debt levels higher, testing regulatory limits. In addition, WBS bondholders are entitled to payment in full, including interest in the event of a refinancing.
One unresolved question is whether some shareholders in the group’s web of holding companies are also creditors. It is possible to take a tax-efficient dividend via interest or debt repayments rather than via common shares. A further £4bn of bank loans and private debt placements sits outside the securitisation borrowings.
None of these complexities should preclude a debt-for-equity swap to reduce financial pressure. If Thames is in trouble, shareholders should be wiped out and bondholders subjected to a haircut.
The Lex team is interested in hearing more from readers. Please tell us what you think of Thames’s financing in the comments section below.
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