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The future of Thames Water is hanging in the balance after KKR, the US private equity firm, walked away from a £4bn rescue deal for the troubled utility that serves 16mn people in and around London.
The next steps for the company, which is struggling under a near-£20bn debt mountain, will be crucial as it tries to stave off temporary nationalisation.
Why did KKR walk away?
KKR spent two months evaluating a deal to rescue Thames Water, with over 100 people both inside and outside the firm working on an intensive due diligence process that included multiple site visits in and around London.
But in the end, it withdrew from the process almost immediately after submitting formal plans that detailed how it would steer a turnaround of Thames Water.
KKR executives in New York grew concerned about the regulatory and political uncertainty around the UK water sector, according to people close to the discussions, given the billions of pounds it would need to commit to a deal.
Fears mounted around the scope for continued political interference in the running of Britain’s largest water utility, the people added.
Even a government-arranged call over the weekend between Prime Minister Sir Keir Starmer’s business adviser Varun Chandra and KKR’s co-founder Henry Kravis was not enough to allay these concerns.
Thames Water was left to announce KKR’s withdrawal on Tuesday, the same day that a government-led review recommended an overhaul of the system of regulation for the water sector.
Will Thames Water’s lenders now step in?
Thames Water now has to rely on its backup plan: a recapitalisation proposal from its senior lenders from whom it secured a separate £3bn emergency loan in March.
Holders of the company’s top-ranking “class A” debt also submitted a detailed turnaround plan to Thames Water and sector regulator Ofwat last week, which included a proposed management team to run the struggling utility.
Thames Water’s class A lenders account for over £17bn of its near £20bn debt stack and include US hedge funds such as Elliott Management, as well as UK asset managers such as Aberdeen. The utility’s lower-ranking class B debt and further loans at its holding companies are expected to be wiped out in a restructuring.
The senior bondholders have indicated that they have commitments in place to provide billions of pounds in new equity funding, according to a person close to the group. They would further strengthen the utility’s balance sheet by writing off a portion of their debt.
While haircuts could be in the range of 25 pence in the pound, the exact writedown depends on the level of concessions on aspects such as fines and other penalties that bondholders are able to negotiate with Ofwat.
The emergency loan of as much as £3bn should give it enough liquidity to last into next year, although the utility has to meet certain conditions to continue drawing on the funding.
Will other bidders come back to the table?
In addition to the proposals from KKR and creditors, Thames Water in March received five other preliminary equity bids from a range of infrastructure investors.
The utility’s decision to award exclusivity to KKR rankled rival bidders such as Hong Kong’s CK Infrastructure, which is part of Hong Kong billionaire Li Ka-shing’s wider CK Hutchison group. Ofwat was also frustrated at Thames Water’s decision to freeze other bidders out of the process, the FT has previously reported.
At least one of those previously jilted bidders is now looking for a way back into the process, with Castle Water — a supplier of water to businesses — stating on Tuesday that it was “ready, willing and able to support the business with the requisite financing in place and can move quickly to provide Thames with the operational and financial support it requires”.
Some have questioned whether it is now feasible for Thames Water and its advisers to reopen the equity-raise process, however. One person close to the discussions said it would be “very difficult” to replicate the extensive due diligence KKR and the creditors had carried out in a quick enough timeframe.
Could Thames Water be nationalised?
With Thames Water’s presumed saviour walking away, speculation has grown over whether it could become the first water company to fall into the government’s special administration regime since utilities in England and Wales were privatised in 1989.
Under this process, officials would appoint an administrator to take charge of the utility, with the UK government providing a loan to fund its operations and ensure that services would keep running. The government could recoup this money if Thames Water was then sold back to the private sector.
Thames Water has already narrowly avoided slipping into a SAR this year. Absent the emergency loan from creditors, the utility forecast its cash balance could drop to as low as £39mn, the FT has previously reported.
While the ruling Labour party has insisted that a temporary renationalisation is not in the interests of taxpayers, it is coming under pressure from rivals from both sides of the political spectrum.
Charlie Maynard, a Liberal Democrat MP who spearheaded a public-interest court challenge to Thames Water taking on more high-interest debt, said the company had reached “the end of the road” and that it was time for the government to step in.
“The creditors who have heaped billions in debt on to the company should now pay to sort this mess out,” he said.
Richard Tice, deputy leader of Reform UK, said the business should be plunged into SAR “for a pound”, wiping out the shareholders and bondholders.
Tice told the Commons: “Caveat emptor.”
