Some problems are too big even for Dynorod. Take the corporate shitshow known as Thames Water. So what if there’s a patch-and-mend fix at the top of the pipe? Until someone sorts out the debt backing up in the operating company, the business will continue to stink the place out.
A quick reminder of what we’re dealing with here. Thames Water Utilities is the ring-fenced, Ofwat-licensed operating outfit drowning under £14.7 billion of net debt that makes a bad job of serving 16 million customers in London and the Thames Valley. Several layers above it, in a Byzantine structure, sits its parent company Kemble Water Holdings, with debt of its own, taking the total to £16.9 billion.
Nine shareholders, led by the Canadian pension fund Omers, with 31.8 per cent, and the Universities Superannuation Scheme, with 19.7 per cent, own the delightful group, with the likes of Abu Dhabi and Chinese sovereign wealth funds making up the gang. The problem? They don’t want to any more.
They were dangling the prospect of putting in £3.25 billion equity and investing £18.7 billion over the next five-year regulatory period to 2030 to improve things on the sewage overflows and hosepipe ban fronts. Instead, they’ve thrown in the towel — hacked off with Ofwat’s refusal to let them jack up customer bills by 56 per cent (including inflation), pay dividends up to Kemble to service its loans and go easy on fines.
A fortnight ago, they refused to put in the first £500 million of the promised extra equity, so raising questions over how Kemble would repay a £190 million loan to its bondholders due at the end of this month. On Friday, they killed any suspense by defaulting on their debts. The upshot? Fevered talk that the holders of the £190 million bond — two Chinese state-owned banks, Allied Irish Banks and the Dutch lender ING — could take control via a debt-for-equity swap.
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If only it were that easy. For starters, debt-for-equity swaps only work if the prize is worth having. Thames is not so much an asset as a liability — submerged in debt and facing a big investment programme. Worse, some Kemble debt, trading at 15p in the pound, is now in the hands of hedge funds, vulture funds and other bottom fishers. Are they the ideal owners of the capital’s underinvested water company?
All the same, with the equity wiped out and the Kemble debt all but worthless, they do have enough leverage for a messy and protracted punch-up with the other debt holders further down the chain in the operating company. But how, in such a rudderless company, do you solve the key problem: the £14.7 billion net debt in that entity?
• Revealed: Macquarie among lenders to Thames Water parent company
Last year, Thames made a £30 million loss on £2.2 billion of income after paying £700 million financing costs. Yet it’s now proposing to double annual capex to £3.7 billion. Unless Ofwat allows a huge hike in bills, which it won’t, Thames cannot invest and service its debt without racking up more losses. Its boss Chris Weston bangs on about the operating company’s £2.4 billion of liquidity — “enough until May or June next year” — and his plan to “go to the market” to seek new equity. Good luck with that. Who’d want to buy into this basket case when the existing owners are running for the hills?
Luckily, the ring-fenced structure gives Ofwat teeth. If, instead of shareholders willing to stick in £3 billion-plus more equity, all Thames can offer is warring debt holders, the regulator can trigger temporary nationalisation via the special administration regime, with its debts getting forcibly restructured. Still, it’s the last thing Rishi Sunak wants with an election looming, not least because it’ll freak out investors in other water and infrastructure assets and increase Britain’s financing costs. But that’s where things are heading unless the Thames chairman Sir Adrian Montague, a veteran of the Railtrack and British Energy blow-ups, can browbeat the debt holders in the operating company to take a haircut on their loans.
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JP Morgan Cazenove analysts reckon “15 per cent to 25 per cent” could be enough for Thames to attract fresh equity owners willing to invest. It may be the least bad option all round. Without that, the taxpayer faces the cost and hassle of replumbing this business — once it’s vanished down the drain.
Rookie error
Left-field appointments can prove inspired. Sadly, not in the case of Dame Sharon White. The John Lewis chairwoman proved every bit the retail rookie she was: a point the Waitrose and department store group has acknowledged with her successor. It’s opted for Jason Tarry, who spent 33 years at Tesco.
White was unlucky, taking charge in Covid-hit February 2020 only to inherit the chaotic revamp of her predecessor Sir Charlie Mayfield, which left no one in charge of the mutual’s two businesses. Yet the ex-Ofcom chief got distracted by her daft target to earn 40 per cent of profits by 2030 from the likes of financial services and housing, rather than focus M&S-style on better retailing. And her only way is ethics schtick grated when, unlike rivals, Waitrose refused to return a penny of Covid business rates relief. She’s smart enough to bounce back, as long as it doesn’t involve shops.
Abrdn jokes aside
Apparently, the disemvoweled asset manager Abrdn is the victim of “corporate bullying” by the media. Who says so? Peter Branner, its chief investment officer, or Brnnr as he’s known internally. “How would you look at a person who makes fun of your name day in day out?” squeals poor old Branflake. In February, Abrdn disclosed that just 42 per cent of its funds had beaten their benchmark over three years. Would he prefer it if we made fun of that instead?
