Thames Water is a financial sewage farm
The self-interest of the City’s financiers is being displayed in its most unedifying guise.
The Court of Appeal has a particularly tricky decision to make this week. It is hearing the appeal against the ruling from Mr Justice Leech in favour of the “rescue” from the majority group of Thames Water bondholders. He described the costs of this proposal as “eye-watering”, and since the ruling, it has emerged that he didn’t know the half of it.
Investment giant Pimco, one of the contributors to the proposed £3bn financing, has inadvertently let the financial sewage into the river. Even before the loan has been approved, it has marked up the value of its share by 17 per cent, and the rules at the Securities & Exchange Commission in the US oblige Pimco to mark the change in book value.
This is surely a material new fact that the Appeal Court must consider before rubber-stamping the loan proposal. As many of us have been arguing since it was made, this proposal has nothing to do with helping Thames out of the mire, and everything to do with the self-interest of the City’s financiers, displayed here in its most unedifying guise.
Should the scales fall from their justices’ eyes, then a form of bankruptcy looms, in the shape of a Special Administration. The government would be obliged to step in to protect the 16m customers and ensure that the water (and sewage) continues to flow. Indeed, there is no need for the government to wait. As has been glaringly apparent for months, if not years, Thames is in gross breach of its operating licence. Its preference for financial engineering over actual engineering is apparent in every river in the Thames catchment.
While the bondholders have been fighting to win control of the business, the Thames board, which boasts of “a wealth of management and financial experience” under Sir Adrian Montague, appears to have nothing to contribute to the debate over the company’s future. The company’s PR machine, on the other hand, is working overtime.
Apparently, London risks being “swamped by burst pipes and sewage leaks” if Thames goes into administration. “Maintenance and repair works could grind to a halt if a multibillion-pound private sector-led bailout is rejected by the Court of Appeal”, anonymous “insiders” told the Daily Telegraph.
Of course. And sewage would come out of the taps instead of water. This is scaremongering at its most laughable. Administration would be messy, and present Labour with problems it would rather avoid, but the mess would not last long. Thames is a solvent business with guaranteed cash flows from its captive customers. Its problem is far too much debt.
Once in administration, the creditors would have to form a queue while the company can be prepared for an offer to the public and a listing on the Stock Exchange. The price could be set to encourage a premium after listing. The proceeds should be distributed to the existing creditors, with trade creditors first. The bondholders would not get back anything like the value of their debt, but they advanced the money to an unnecessarily complex, overborrowed pyramid of a business in the first place.
They would certainly take more care next time.