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Two Chinese state banks play a crucial role in the future of Thames Water, as part of a group of lenders embroiled in a standoff over the debt of the parent company of Britain’s largest water company.
Thames Water’s direct parent company, Kemble Water Finance, has a £190m loan which shareholders last week said they would be unable to repay when it fell due on 30 April.
The lenders, which have so far refused to extend the loan without an injection of new capital from Thames Water’s owners, are the Bank of China and the Chinese state-owned Industrial and Commercial Bank (ICBC), as well as Allied Irish Banks and Dutch lender ING Banks, according to people familiar with the matter.
This means that in the event of a default on the loan, the two Beijing-owned banks could become shareholders in Thames Water.
Their key role comes in the context of tensions over Chinese investment in Britain. The UK has moved to limit Chinese investment in critical infrastructure such as the planned new Sizewell C nuclear power station in Suffolk and force telecoms groups to remove Huawei equipment from the country’s communications network.
The UK used national security powers to intervene in eight deals involving China-linked investments in British companies in the 12 months to March 2023.
Thames Water shareholders, including Chinese sovereign wealth fund CIC, last week backed away from providing £500m in new shares, signaling their willingness to take an estimated £5bn loss on their investment in the service water.
If Kemble defaults on the loan, it could trigger a change of ownership of Thames Water, although the utility company’s debt is expected to remain unchanged.
However, Thames Water, which supplies water to a quarter of the British population, remains in difficulty. Although it says it has £2.4bn of cash – enough to run the business for the next 15 months – it needs more than £3bn of capital by 2030 and a sharp increase in customer bills to maintain services and provide improvements.
The company, which provides water and sewerage services to around 15 million customers, is struggling with the effect of higher interest rates on its £18 billion debt, as well as inflation in the costs of labour, energy and materials and a series of fines for wastewater pollution.
The government stands by in case there is a need to temporarily renationalize the company, under the project codenamed Project Timber, in reference to the logger’s warning before an impending fall.
Shareholders’ refusal to provide new funds leaves the government and regulator Ofwat facing a dilemma: the only way to stop investors walking away is to accept concessions, which would be paid for through bill increases, at a time of public protest over wastewater pollution and other service failures.
Shareholders have called on Ofwat to approve a 56% real terms increase in bills by 2030 and to provide leniency on dividend rules, pollution fines and investment plans. Ofwat is expected to make a draft decision in June and a final ruling early next year.
One problem is that Kemble relies on dividends paid by the regulated operating company, which receives the money from customer invoices.
However, new rules introduced by Ofwat last year prevent dividends from being paid by the operating company if they put the company’s financial resilience at risk or if a utility underperforms on social or environmental measures. Ofwat has already opened an investigation into a £37.5 million dividend paid by Thames Water in October last year, with a ruling expected within weeks.
Fitch Ratings downgraded Kemble’s credit rating to CC on Thursday, indicating that “a default of some kind appears likely.”
At least one of the lenders has attempted to sell its position in the loan in recent weeks, according to distressed debt investors, but has struggled to find buyers even at steep discounts to face value.
Bank of China, ICBC, ING, AIB, Kemble and Thames Water declined to comment.
Additional reporting by Will Louch