Thames Water’s accelerating cash burn exacerbates debt woes

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Thames Water is burning cash at a faster rate than it earlier expected, piling pressure on the troubled utility to extend the term of £530mn of debt due to expire next month as the company seeks to avoid a renationalisation.

The UK’s largest water supplier has spent more money than it budgeted for in liquidity forecasts made in July, according to two people familiar with its finances. Those forecasts projected that it had enough cash to last until May 2025.

Thames has to extend a £530mn credit facility from banks that falls due on October 7, if it is to stay within an updated forecast made last week of having enough cash to last into the new year.

This loan was previously rolled over in April, but Thames has not yet agreed a new extension with its lending banks, according to people familiar with the matter. The utility has another £530mn loan that is due to expire in December, having previously been extended in June.

Thames Water is locked in negotiations with lenders over this and is “confident” that they will extend the facility in October, according to one person familiar with the utility’s thinking. Another person close to the discussions said that not extending the loan “blows the whole thing up”, so they expect the banks to ultimately acquiesce.

Thames Water, which supplies water and sewerage services to roughly a quarter of the population in England, is struggling under the weight of its nearly £19bn of debt — including borrowing at its parent company — and is seeking to avoid the government’s special administration regime, a form of nationalisation.

It is trying to raise potentially billions of pounds of equity to bolster its finances but the process, which is being run by investment bank Rothschild & Co, has been met with widespread investor scepticism.

Any equity will also be conditional on agreements over bill increases with watchdog Ofwat as well as a deal on regulatory fines; investors are concerned that these could wipe out any cash injection.

Thames Water announced on Friday that it had begun negotiations with its lenders to release £380mn of cash, which it has had to hold in reserve under the terms of its debt agreements. If it cannot access this reserve cash, and a further £420mn of credit lines, it will run out of cash shortly after Christmas, according to the statement.

In this scenario, the regional monopoly said it would have to “enter standstill under our financing”, giving it access to the £380mn of cash reserves and a further £550mn of “reserve liquidity facilities” that would take it through to May next year.

Accessing these facilities by entering into a so-called “standstill” would trigger restrictive covenants across its debt structure and is classed as a form of default in its bond documentation.

While the company can remain operational during that process, it would face new restrictions such as a “cessation of capital expenditure other than for essential maintenance”, according to its latest accounts.  

While lasting until May 2025 is in line with a forecast Thames Water gave in its annual report published in July, the pressures on its cash position have pushed it to change how it calculates this so-called “liquidity runway” to May.

Thames Water earlier excluded the £550mn of reserve facilities from these forecasts, but in its Friday announcement said they were now included in this analysis.

“We’ve always been very clear that Thames Water’s liquidity runway comprises both cash and undrawn facilities, and our statement on Friday was consistent with this position,” Thames Water said. “We remain focused on extending this liquidity runway further through discussions with our creditors.”

Thames Water is also in negotiations with a group of 90 creditors holding £9bn of debt at the utility’s operating company to provide a new loan that could be in the region of £1bn to further ease pressure on its finances before year-end, according to people familiar with the negotiations.

Any financing from this group — which includes US hedge funds such as Elliott Management and UK asset managers such as Abrdn — would rank ahead of the utility’s existing senior debt, they added.