The water industry regulator is to appoint an independent monitor to supervise Thames Water’s turnaround plan after it breached its licence conditions last month when some of its debt was downgraded to junk status.

Ofwat, the regulator for England and Wales, said on Wednesday that the monitor would have access to the company’s financial information and would report back to the regulator, as the UK’s biggest water company attempts to avoid a government-handled administration.

Thames’s credit rating was downgraded twice by the ratings agencies Moody’s and S&P in July, breaching its licence conditions.

Ofwat said it had launched a 10-day industry consultation after provisionally accepting a series of undertakings “in lieu of imposing an enforcement order” on Thames, which would have been triggered by the downgrades. The order could have included a fine of up to 10% of annual turnover, equating to hundreds of millions of pounds.

The water company, which has 16 million customers in London and Thames Valley, has promised to appoint new independent directors, improve its business plan and “use all reasonable endeavours to raise substantial equity investment”.

David Black, Ofwat’s chief executive, said: “We are clear that Thames Water needs to remedy its licence breach, turnaround its operational performance and secure backing from investors to restore its loss of investment-grade credit rating.

“These enforceable commitments will include our putting an independent monitor into the business, to report back to us on what is happening to drive meaningful change in performance, and to ensure appropriate expertise is added to their board.

“We will continue to monitor progress very closely and will not hesitate to take any further action if necessary.”

Thames Water was put into special measures by Ofwat last month, and its five-year business plan – submitted in Ofwat’s PR24 price review process – was deemed “unsatisfactory” by the regulator in its draft response, published in July.

The UK’s biggest water company, which has a £15.2bn debt mountain, has said it has enough cash to continue trading until at least May 2025. If it fails to secure new investment it could be placed into a special, government-handled administration.

On Tuesday, Ofwat proposed a penalty of £104m for Thames as three water companies were fined a record £168m between them for a “catalogue of failures” over illegal sewage discharges into rivers and the sea.

Matthew Topham, the lead campaigner at We Own It, said: “Ofwat’s plans for an independent monitor are part of a longstanding decision by regulators and governments to nurse failing privatised water companies back to health at our expense.

“It sends the sector a message: no matter how badly you underinvest in sewage prevention or mismanage your finances, we will let bill payers pick up the cost of cleaning up. Without a threat of losing their licences, operators will feel they can get away with anything.

“Government must get a grip of the situation and use the ultimate enforcement measure, special administration, to prevent the current shareholders from doing any more damage and to show the wider sector that failures of this scale will not be tolerated.”

Steve Reed, the environment secretary, has said the company will not be temporarily nationalised as it remains “financially viable” and should be “given space” to raise funds.

Thames needs an extra £2.5bn from investors to fulfil its business plan. Ofwat has said Thames can increase bills by £99 to £535 a year over the next five years, £92 less than the rise it sought.

Ofwat has provisionally said it can spend £16.9bn of a proposed almost £22bn as it attempts to upgrade ageing infrastructure amid anger over leaks and sewage spills.

Analysts at RBC Europe said: “There is still a clear challenge for Thames around its ability to finance the material capital expenditure requirements for [the next five years], while in its current structure we do not believe that Thames represents an attractive proposition for new equity.”

A spokesperson for Thames Water said: “We note that Ofwat is minded to accept the undertakings we have proposed but understand the need for them to consult before doing so. We remain focused on working with Ofwat to secure an investible PR24 determination, which is key to attracting equity into the business.”