Britain’s water regulator stands accused of allowing Thames Water to come under the control of hedge funds and other creditors without a formal transfer of ownership for Britain’s largest water company.
Legal control of Thames Water has passed to creditors providing a controversial £3bn loan to the cash-strapped utility without Ofwat’s formal approval, according to claims set out in a letter to the regulator earlier this month by Charlie Maynard, a Liberal Democrat MP.
Senior creditors of the utility include the hedge funds Elliott Management and Silver Point Capital, as well as institutional investors.
The regulator is meant to approve any change of control in ownership. Rather than narrowly defining Thames Water’s “ultimate controller” as its legal owner, the utility’s licence with Ofwat casts it more broadly as “any person which . . . is in a position to control or in a position to materially influence the policy or affairs”.
Typically that role would be fulfilled by the company’s shareholders. But Thames Water’s equity investors — which include the pension funds Omers and USS, as well as Chinese and Abu Dhabi sovereign wealth funds — have walked away from the business and have declared the company “uninvestable”.
Since then, they have written the value of their stakes down to zero, removed representatives from Thames Water’s board, and are seemingly playing no role in its current or future management. A process is under way to try to find new equity investors.
Thames Water’s shareholders “now appear to have no position of control or material influence over” the utility, while the senior bondholder group seemingly “meets that definition”, the letters from Maynard’s lawyers at Marriott Harrison read.
The claims come as the company is waiting for a key judgment from the Court of Appeal as rival groups of bondholders litigate the emergency £3bn loan, which is helping keep Thames Water afloat. Without it, the company has said it will run out of cash in late March.
Tim Short, an investment banker and expert on regulated financing structures, accused Ofwat of a “flagrant dereliction” of its duties that could dent investor confidence in the regulatory system.
“It is clear that a change of control has already occurred because the previous controlling parties have walked away; yet Ofwat has allowed a situation where there is no clear ownership of the company or oversight of the board, and no consideration of the public interests,” he said.
Ofwat denies that is has allowed a change of control through the emergency loan. In responded to Maynard by saying that Thames Water informed it in January that no change had occurred, and the regulator has “continued to keep this position under review”.
When asked to respond to the allegations, Ofwat said: “A comprehensive financial and operational turnaround at Thames is essential. The company must continue to pursue all options to seek further equity to fund its turnaround plan for the benefit of customers and the environment. Our turnaround oversight regime that was introduced last year, including an independent monitor, is in place to give us oversight of this.”
A Court of Appeal judgment is expected next week over the emergency funding. If judges reject the senior bondholders’ proposed loan, which comes with a punitive 9.75 per cent interest rate and fees, the company is widely expected to fall into the government’s special administration regime, a form of temporary renationalisation.
Estimates of costs to the taxpayer if the company were to fall into a SAR vary wildly. Thames Water presented in court a forecast from its adviser, Teneo, that the government would have to stump up £3.4bn to £4.1bn of funding in a SAR. This highly secured loan — which is not a foregone conclusion — could be fully recouped if Thames Water is then sold. The company’s debt interest could also be frozen under a SAR.
Maynard, who appeared at the Court of Appeal hearing, and others have disputed Thames Water’s figures and the MP’s barrister raised questions about the independence of Teneo, given it is also an adviser to the utility. Instead, Maynard’s team has estimated a SAR would cost just £66mn. Ofwat said it has not seen evidence to support this much lower figure.
In a first-instance hearing last month over the loan dispute, Thames Water’s general counsel, Andy Fraiser, and a lead adviser to the senior bondholders, David Burlison, both accepted that the top-ranking bondholders were now the “economic owners” of the utility due to its growing financial distress.
Burlison, a senior restructuring banker at Jefferies, also said that his clients — which include US hedge funds such as Elliott Management — “want to have elements of control” over Thames Water.
The senior bondholders said in a statement to the Financial Times: “Creditors do not have any ownership or equity governance rights over the company. They are not the shareholders but they are working hard to help get the company back on a sustainable footing given it has no equity value and all shareholders have walked away.”
Thames Water said: “Our creditors are not our ultimate controllers and our liquidity extension plan has no impact on the ownership or ultimate control of the business, which has not changed.”
