Lloyd Harris, Head of Fixed Income and Assistant Fund Manager Kishan Paun discuss the news emerging that the government may appoint an administrator for Thames Water, something their readers will know they forewarned. They also delve into to the broader UK water sector and what may turn the tide for fixed income investors.
‘FTI Consulting Likely to Be Thames Water Administrator: Sky’
News broke yesterday morning that the government has lined up FTI Consulting as the likely administrator for Thames Water, should the company enter a Special Administration Regime (SAR). This marks a critical moment for Britain’s largest water utility, which serves around 16 million customers and is burdened by nearly £20 billion of debt. Thames has come to represent everything that’s gone wrong in the UK water sector: excessive dividend payouts, aggressive leveraging, and chronic underinvestment. Astonishingly, the company still doesn’t know the location of many of its pipes!
Blame could be placed on Thames’ management, shareholders, Ofwat, or successive governments. In truth, and as the history books will likely conclude, the failure is collective. In two blogs last year (H2Uh-Oh: The Thames Water Saga; Thames Water and the Temple of Doom), we outlined how administration was a probable outcome. Investing in Thames was akin to betting on a horse.
Hefty Haircuts for Thames Bondholders
Since shareholders walked away last year, no new owners have stepped in. Ofwat’s preferred bidder, KKR, withdrew at the last minute, citing concerns about throwing good money after bad. Thames was left adrift, and its creditors (now reluctant owners) are attempting to steer the ship.
Thames has passed the point of no return. Bondholders face steep losses, and while the exact haircut is hard to predict, it’s clear there’s no investment case here. As we’ve seen in other regulatory interventions, outcomes often defy expectations.
“Regulate for Growth”
We’ve heard this phrase often from Rachel Reeves, and in its current state, there isn’t much growth happening at Thames. In fact, the entire sector is being dragged down by Thames’ troubles. That said, we’re confident the government will want a swift resolution during administration. The current market backdrop is relatively friendly, which should allow the rest of the sector to move on promptly and begin delivering the substantial investment needed in the UK’s water infrastructure over the coming years.
Drawing a Line Under Thames Is Good News
Despite Thames’ troubles, the broader UK water sector has seen signs of recovery. Ofwat’s allowed returns for the next five-year period came in above expectations, helping to restore investor confidence. In response, shareholders have injected equity into Pennon, Anglian Water, and even Southern Water to shore up balance sheets.
The recent Cunliffe Review has also laid out a path forward: a new regulator, stricter capital requirements, and higher returns – all aimed at making the sector investable again.
For years, we were bearish on UK water. But the tide has turned. With Thames isolated and reforms underway, we believe the sector can offer both stability and return. Investors must now price in the reality that even utility companies can fail, but that risk is now better understood and managed.
It’s time to view UK water much more favourably.
