Thames Water Ltd. said it needs “significant additional funding” in the years ahead to service its debts and fix leaky pipes, even as investors agreed to put an extra £750 million ($960.4 million) into Britain’s biggest water utility.
Bonds regained some ground on Monday following news of the emergency funding, as Thames tries to stave off the threat of a state takeover. The equity injection is less than the £1 billion the company had been trying to raise, and a further £2.5 billion is needed in the five years to 2030 to push through a crucial turnaround plan.
Thames Water, which serves about a quarter of the population, has been at the center of a crisis in the sector as rising interest rates drive up payments on inflation-linked debt. Regulators are expected to demand more investment into Britain’s water infrastructure which suffers from chronic leaks and frequent over-spills of raw sewage into rivers and seas, raising questions about the merits of privatization.
“For now, it’s kicked into long grass,” said Luke Hickmore, investment director at Abrdn Plc, who holds Thames Water secured bonds. He said the funding package, alongside the company’s cash generation, “may well be enough as it is.”
However, Susannah Streeter from retail trading platform Hargreaves Lansdown said the £750 million “is very much an emergency pumping operation, rather than shoring up Thames Water’s finances for the longer-term.”
A £400 million junk-rated bond issued by Thames Water’s holding company jumped more than 8 pence on the pound to 68.1 pence as of 12:15 p.m. in London, but remained well below levels prevailing two weeks ago. A €650 million ($712 million) 2027-dated bond by the operating company rose 1.8 cents to 94.8 cents on the euro.
The utility has held talks with government officials and regulators over contingency plans — including a possible temporary nationalization — but the government believes public ownership can be avoided, people familiar with the matter said last week.
Read More: UK Government Believes Thames Water Can Avoid State Takeover
The agreed investment “looks sufficient to shore up the balance sheet,” said Paul Vickars, a credit analyst at Bloomberg Intelligence. “Thames Water should be able to avoid being placed into a special administration regime.”
However, the company will need to raise more debt to invest in infrastructure, keeping gearing under pressure.
The firm’s net financing costs climbed 24% in a year due to higher borrowing to fund investments and the impact of inflation, which drove up its index-linked debt. Statutory net debt has jumped to almost £14 billion, up more than £1 billion year-on-year. Gearing fell to 77.4%, according to the company.
“With inflation and high interest rates set to linger for longer, the cost of servicing debt for water companies will remain expensive,” Streeter added.
QuickTake Explainer: Thames Water Is Drowning in Debt. What Went Wrong?
The equity funding comes almost two weeks after Chief Executive Officer Sarah Bentley abruptly quit. Two days later, city veteran Adrian Montague was appointed chairman. Lawmakers are due to question present and former executives — along with representatives of the regulator Ofwat — over the firm’s financial resilience on July 12.
Thames Water incurred £82 million in annual penalties from Ofwat due to poor performance, £50 million more than a year earlier. The company blamed “extreme weather and aging assets” for operational issues.
--With assistance from Tasos Vossos and Priscila Azevedo Rocha.
(Updates bond prices and adds detail throughout.)
