Make-your-mind-up time approaches for Thames Water. The directors may not have liked Ofwat’s “final determination” last month – even though the regulator allowed bill increases of 35% over the next five years – but if they wish to dispute it, Thames is free to appeal to the Competition and Markets Authority (CMA). The deadline to do so is 18 February.
Along the way, it seems, we’ll have to witness another round of lobbying and brinkmanship. In one corner, Thames seems to be trying to terrify the government into thinking the world will end if the company falls into the “special administration regime”, or SAR – the temporary nationalisation setup for failing or bankrupt water companies.
That, at least, is the way to read the report in the Times this week that the company has warned ministers (again) it is in danger of disappearing down the SAR plughole unless Ofwat coughs up more concessions. The corporate pitch is familiar: think about the bondholders who would be burned if Thames collapses; they are also the folk you need to fund nuclear power stations, windfarms and more.
In the other corner, the government, having previously given the impression that it doesn’t fancy SAR one bit, is signalling it is now ready to go there if necessary. The FT reported on Thursday that three consultancies have been approached about taking the role of special administrator.
How to read the manoeuvring? Well, when you’re in a hole as deep as Thames’s, anything is worth a try: raising visions of a riot in the debt markets is an obvious line to take. But there are at least four reasons why the government has to hold the line here. Ministerial willingness to allow SAR has to be solid.
First, as the name suggests, Ofwat’s final determination is meant to be its last word on bills and business plans for the next five years. As with all the water companies, the numbers were decided after two years of back and forth and the submission of tens of thousands of pages of documents. For the sake of credibility, the game cannot be replayed after the final whistle. An appeal by Thames to the CMA would be different: it would be part of the established process.
Second, Ofwat’s verdict last month was seen as mildly helpful for the companies as a whole. The regulator’s greater generosity on cost of capital – one of the key numbers in the mix – was described on the day by analysts at Barclays and Jefferies as a “positive” outcome for the three firms that are still listed in the stock market. If the figure still wasn’t generous enough for Thames, tough. There cannot be preferential treatment.
Third, Ofwat’s deal was also stuffed with many of the special revenue-sharing and “gated” mechanisms that the industry had requested to make it easier to raise capital. Again, there is a limit to how many tailor-made features can be handed to one company.
Fourth, debt markets are already adjusting. The small “B” class of Thames debt is trading at pennies in the pound and the “A” class, representing the bulk of the £16bn of borrowings, is at about 70p. In other words, the holders already realise there will be haircuts in the inevitable financial restructuring. If they can agree a debt-for-equity swap among themselves, fine. If not, it has to be SAR.
None of which is to deny that the bankruptcy of the country’s biggest water company would be poor advertising for a government trying to promote its growth credentials. But the outrageous outcome would be the one in which government backslides and gifts to bondholders at the expense of taxpayers or bill payers. There can be no wobbling. The threat of SAR has to be real.
