Thames Water closes in on £16bn rescue deal with lenders

Thames Water is edging closer to a multibillion pound rescue deal with its lenders that would keep the ailing utility out of temporary public ownership.

Sky News has learnt that a group of creditors holding £13bn of Thames Water's total debt mountain of £20bn is aiming to sign an in-principle agreement with Ofwat and the company by the middle of next month.

Under the agreement being discussed, lenders would take a haircut on the Class A debt they are owed of up to 30%, an increase from the 25% disclosed in an announcement in October, according to one industry source.

In total, more than £13bn of existing value - up from £12.5bn - is expected to be written off when a final deal is put to the participating investors, which include Assured Guaranty, Invesco, Elliott Management, Silver Point Capital and Farallon Capital Management.

In exchange, they would receive a minimum of 10% of the recapitalised company's equity.

A planned new equity injection of £3.15bn is also likely to be increased if an agreement is reached, the industry insider said.

Last year, Thames Water's creditors said they would commit £3bn of emergency funding to keep Thames Water afloat.

Half of that sum has already been drawn by the company, with the in-principle agreement needing to be confirmed in order for Thames Water to access the second £1.5bn tranche, which would fund the company to the end of the restructuring process.

Thames Water's would-be owners have also committed not to sell the company before 2030 - with a stock market listing expected to be arranged at some point after that - while they have pledged not to take any dividends during the period of its Turnaround Oversight Regime or until it goes public.

The consortium has also said that customer bills will not rise beyond increases already agreed with Ofwat.

An announcement about an outline deal, which one source said could come as soon as the week after next, would represent the clearest sign yet that Britain's biggest water utility can be solvently recapitalised and remain out of a government-orchestrated special administration regime (SAR).

That would be a relief to the Treasury, which is determined to keep Thames Water's mountain of debt off the government's books.

This weekend, however, regulatory sources cautioned that "gaps" remained between the creditors and watchdogs over both the financial and other terms of the prospective agreement, meaning that an agreement could yet be delayed beyond the middle of February.

"There's still no guarantee that this gets done," said one.

Under its business plan, the London & Valley Water consortium wants to spend £20.5bn on infrastructure and service improvements over the next five years to tackle the company's appalling record on waste and sewage pollution.

Ofwat had rejected a previous blueprint proposed by the company which would have allowed it to spend £24.5bn during the next five-year regulatory period.

If successfully completed, the deal would be one of the most complex corporate restructurings ever seen in Britain.

It requires the approval of Ofwat, the Environment Agency and the Drinking Water Inspectorate.

If an agreement is approved by regulators and Emma Reynolds, the environment secretary, it would be subject to a public consultation because of modifications Ofwat would be making to the company's operating licence.

The deal will also require sanctioning by the courts.

An insider said the terms of the deal, which are still to be finalised, were also expected to be submitted to Downing Street for review in the coming weeks.

One area of potential scrutiny is likely to relate to an agreement on Thames Water's future regulatory penalties, although London & Valley Water has pledged that the company's outstanding fines would be paid in full.

Negotiations over Thames Water's future come at a critical time for the UK water industry.

A white paper was published this month by ministers confirming plans to abolish Ofwat and establish a new regulator, with an 'MOT-style' approach to supervising water infrastructure.

The document also set out plans to introduce a new regime to enable struggling water companies to be turned around.

The privatised sector's travails have been further highlighted this month by the scandal at Thames Water's neighbour, South East Water, which is facing calls to sack its chief executive over outages which have left thousands of Kent households without a reliable water supply.

Thames Water's most recent consortium of shareholders, which included the Universities Superannuation Scheme and an Abu Dhabi sovereign wealth fund, have written off the value of their investments in the company.

Last August, Sky News revealed that Steve Reed, Ms Reynolds' successor as environment secretary, had signed off the appointment of FTI Consulting to undertake contingency planning for a SAR - a regime which has only been tested once before, with the collapse of energy supplier Bulb.

Since then, FTI Consulting is understood to have had little engagement on the project amid the ongoing talks between creditors and Ofwat.

KKR, the private equity behemoth, pulled out of talks to buy Thames Water last summer, while Hong Kong-based CK Infrastructure has attempted to gatecrash the process with little success.

Mike McTighe, the veteran corporate troubleshooter who chairs BT Group's Openreach division, has been parachuted in to work with the creditor group as the company's potential chairman.

In October, he said: "There is a huge amount of work to be done to turn around Thames Water and deliver the improved service and environmental outcomes that customers and local communities deserve.

"From day one, we will inject billions in new investment, strengthen Thames Water's balance sheet, transform the company for thousands of hard-working frontline staff and begin the delivery of an operational turnaround that puts 16 million customers and the environment first."

This weekend, an Ofwat spokesperson said: "We continue to engage with London & Valley Water and are reviewing their plans carefully to assess whether they deliver a turnaround in the company's operational performance and strengthen its financial resilience to the benefit of customers and the environment."

DEFRA has been contacted for comment, while Thames Water and London & Valley Water both declined to comment.

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