Congratulations to Thames Water: it is not going bust early in the new year. Probably. The necessary three-quarters of A-class bondholders have backed a proposal for the company, already drowning in £15bn of debt, to borrow another £3bn at the nose-bleed rate of 9.75% plus a hefty serving of fees on top. And, critically, the numbers are looking good to get permission from bondholders to access £400m of cash reserves.
A court still has to approve the new £3bn of “super senior” funding – meaning debt that ought to be super-safe because it ranks above both the A class of bonds and the junior Bs. But if that hurdle is cleared next month, Thames will have shoved its debt mess around another U-bend. The script then imagines a more permanent restructuring of the finances – surely with hefty debt write-downs – at some point in the next 18 months. The company may also take a detour to the Competition and Markets Authority to appeal against Ofwat’s final proposal (also due next month) on bills for the next five-year period.
Everybody happy? Well, of course not. The transparency around this emergency fundraising process has been miserable. Why has the board of Thames not explained why it wants to borrow at 9.75% when the B class of bondholder was touting an alternative proposal at 8%? Wednesday’s announcement didn’t bother to address the question.
Mutterings from the wings suggest the Bs arrived too late in the day, that only the As were likely to get the necessary 75% support, and the corporate priority was survival and the need to avoid sudden collapse into special administration, AKA temporary nationalisation.
Come on, though – the borrowing terms aren’t a small detail. A rate of 8% beats 9.75% and, once the various pots of fees are totted up, the gap in terms of hard payments by Thames may amount to hundreds of millions of pounds. The precise figures are disputed but the board of Thames is perfectly positioned to offer a definitive opinion. But it hasn’t. This newspaper reported at the weekend that the board was split over which deal to back, which would be understandable. But, if it has now come to a conclusion, it should explain its thinking.
One can, of course, see this affair as the normal argy-bargy one sees between different classes of bondholder in any restructuring. And, at one level, that’s correct. Everyone is jostling for position in the eventual permanent debt-for-equity swap, and it’s no surprise that the As, as the senior and bigger class of bondholder (£12bn-worth), have brought more muscle to the scrap.
Yet Thames is not any old company. It is an outfit with 16 million customers that has failed those customers so badly it is now in a form of regulatory “special measures”. And, since the current emergency fundraising will have a direct bearing on the debt-for-equity conversion – and thus who emerges as owners – transparency ought to be set to maximum.
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In theory, the poor old customers – already braced for substantially higher bills whatever happens – are spared additional financial pain via this emergency debt top-up. But some of us would still like to know how the board is reaching its decisions. Yes, the company is a deeply distressed borrower – but it’s still allowed to explain its thinking.