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Thames Water shareholders on Thursday signaled their willingness to take an estimated £5 billion loss on their investment, barring an injection of new shares into the troubled group.
Amid growing uncertainty over Thames Water’s future, people close to shareholders have said many are preparing to write off their entire £5bn investment in the UK’s biggest water company.
The move dealt a blow to the group’s hopes of finding a way out of the financial impasse. Thames Water needs billions of pounds to maintain operations and renew aging infrastructure.
Its nine shareholders, including Chinese and Abu Dhabi sovereign wealth funds, and British and Canadian pension funds, said on Thursday the water company is “uninvestable” as they backtracked on a pledge to provide £500m of capital just this month.
A person familiar with the discussions said the shareholders’ decision was far from final. “There is very little chance they will come back from this situation,” added a banker close to the talks.
The warnings came just hours after Thames Water insisted it could still persuade shareholders to invest more money if Ofwat, the industry regulator, agreed to more favorable terms to govern the company.
Shareholders are in conflict with Ofwat over the criteria for injecting more funds. Investors have called for the chance to raise bills and relax rules on dividend payments, despite public anger over sewage discharges and the privatized company’s service record.
Meanwhile, Thames Water’s ability to service its £18.3 billion debt has come under pressure by the regulator’s moves to limit dividend payments.
Its parent company Kemble is due to repay a £190m loan next month.
But Kemble told his lenders on Thursday that investors’ decision to back down on providing 500 million pounds of new equity would leave him unable to continue paying interest and unlikely to roll over the loan.
Kemble’s bonds subsequently fell to just 15% of face value.
While Thames Water management has long insisted that Kemble’s travails should not impact the regulated service, the water company’s bonds have also fallen.
Ofwat has asked Thames Water to “pursue all options to seek further equity capital for the business in order to turn around the company’s performance”. But, adding that customer services would be protected, he said: “We need to ensure the sector attracts investment and is fair to taxpayers.”
Solutions could involve a debt-for-equity swap that would wipe out Thames Water’s current shareholders, a slide into special administration that would see outside directors seek new investors, or a potential renationalisation of the business.
Two of Thames Water’s largest shareholders – pension funds USS and Omers – have already made significant write-downs on investments funded by pensioners’ savings.
Shareholders had previously promised £500m by the end of March and £3bn by 2030, which Thames Water said would put the company on a “stable footing”, without taxpayers’ money.
That commitment was based on Ofwat agreeing to a 56% increase in water bills over the next five years, as well as an indulgence on regulatory fines.
Thames Water sought to reassure the public that discussions were continuing. Chris Weston, the company’s chief executive, told Radio 4 that extraordinary administration was “a long way off” and could be avoided if shareholders agreed to provide funds. The company said it has £2.4 billion in cash and access to other overdrafts, enough to continue trading until 2025.
The company added that it will pursue all options to secure new investments “from new or existing shareholders”.
British Chancellor Jeremy Hunt said the Treasury “will continue to monitor very closely what is happening at Thames Water.” He added: “Our understanding is that the company is still solvent, today’s news is not expected to impact on the services received by customers.”
Thames Water was thrown into chaos last June when chief executive Sarah Bentley resigned after a board row over its turnaround plan. In December she announced that Weston, the former boss of British Gas, would be her permanent replacement.
The company said it still hopes to agree a business plan with Ofwat that is “affordable for customers, achievable and fundable for Thames Water, as well as investable for equity investors”.