Well, cry me a river. With so much at stake, it’s hardly surprising to see the denizens of the bond market rising from the deep to try and protect their positions in the vast sea of debt that is drowning Thames Water.
Just think of how sorry you’ll be when it comes to the next grand project, they are saying. Be nice to us now, and we’ll be there for Sizewell C, a trans-Pennine railway or whatever multi-billion-pound indulgence you want to keep off the public balance sheet. The argument is all about how much pain investors should bear from the recapitalisation of Britain’s near-bankrupt water company, or how much the consumer will be forced to pay to restore solvency.
We have already seen the proposal from the Thames management – a 40 per cent rise in water bills in five years – plus inflation, natch. In return, the shareholders would put in enough capital to keep the business afloat. The bond markets would then be prepared to lend again to provide enough to allow Thames to comply with the regulations the company has spent so many years flouting.
The argument is set out in a well-sourced article in the FT, full of the need to maintain confidence in “whole business securitisation”. This mechanism has supposedly been the “gold standard” for financing state-sponsored projects and was thought to make water company debt almost as good as a government bond. Force a serious haircut on the holders, and the cost of future financing for the whole industry will rise, they say. London would suddenly seem a riskier place for bonds, and who wants that? Give us a modest session with the hair clippers, but let us get away with this, and stiff the consumer instead.
This is so much chop suey. The better alternative is to wipe out the shareholders (who have effectively admitted that their shares are worthless) and swap, say, half of the outstanding £18bn of debt for new equity. The bondholders’ representatives should be locked into the Bank of England until they can agree among themselves how to allocate the £9 billion of financial pain. Were Thames a listed company, they would already be there.
The write-off would transform the balance sheets of the Thames structure, presenting an attractive proposition for lenders.
It would not take long for New Thames to attract capital. Memories in the bond markets are notoriously short – Mexico was able to raise 100-year money despite a long history of defaults.
Thames’ crisis is self-generated – the share prices of Severn Trent and United Utilities, the other two big water companies, seem unaffected. The root cause is the replacement of equity (paid out as dividends) by debt by Macquarie, the previous owners. The lenders have only themselves to blame because they supplied the loans, while it has been plain for years that Thames was over-geared. But, for the period of almost-free money after the 2008 banking crisis, this crisis would have arrived a long time ago.
Ofwat does have some analgesic it can offer to ease the pain of write-offs for the lenders. It’s clear that water bills must rise – but not by 40 per cent – while New Thames could be let off significant fines in return for demonstrating real commitment to a clean-up.
Unfortunately, as the ranks of hot-shot lawyers assemble to battle with the regulator (and each other), there is every chance that they will bamboozle Ofwat, or that a desperate government will let them dump the debt onto the state balance sheet. Just remember that it doesn’t have to be this way.
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