Thames Water: Focus on Andy Burnham’s privatization plans

This report is from this week’s CNBC UK Exchange newsletter. See what you see? You can subscribe here.

If Andy Burnham becomes Britain’s next prime minister, he could soon be embroiled in a showdown with some of the world’s biggest and most feared investors.

Among them, Elliott Management Apollo Global Managementsimilarly black rockSilver Point Capital, invesco.

All are creditors of Thames Water. Thames Water serves 16 million homes and businesses in London and the South East of England and is the UK’s largest water and wastewater utility. Debt is approaching 20 billion pounds ($26.5 billion) and on its current trajectory it is expected to run out of cash by October this year.

To this end, the main creditor group, a consortium called London and Valley Water (L&VW), has been in negotiations with water industry regulator Ofwat since June last year.

The consortium’s latest proposals, submitted in March this year, would see Thames’ £9.4bn of debt written off. L&VW will also inject approximately £3.35bn worth of capital into the business, as well as provide new debt facilities initially worth approximately £3.25bn, which could eventually increase to £6.55bn.

As part of the deal, L&VW has committed that Thames’ largest shareholder will not sell a significant portion of its shares during the current regulatory period from 2025 to 2030. Thames has also committed not to pay a dividend until April 2035, or until the company returns to the public market, so all cash will be reinvested.

Part of the proposal would see Ofwat take a more generous stance towards Thames, whose performance has repeatedly drawn the regulator’s ire.

But last month, Environment Secretary Emma Reynolds wrote to Ofwat expressing concerns about the bailout. “We are not convinced that the current proposals are good enough for consumers and the environment,” he said.

This raises the possibility that the River Thames, which was privatized in 1989 along with nine other regional water authorities in England and Wales, could be temporarily brought into public ownership through a so-called Special Administration Regime (SAR).

It is thought that the Ministry of Finance is concerned about this. With the government already running a budget deficit equivalent to 4% of UK GDP and the national debt currently standing at around 95% of GDP, the last thing the government wants is for Thames debt to slip onto the national balance sheet and taxpayers to set aside £19.8bn of Thames planned infrastructure investment during the current regulatory period.

The Treasury is also thought to be concerned that adding the River Thames to the SAR could dampen overseas investment in UK infrastructure.

It features Mr Burnham who wants “more public control” over energy and water companies.

He told the Guardian last month: “Public ownership is absolutely an option. I say it should be the case for the Thames.”

Mr Reynolds has then given creditors room to improve terms, but it is hard to see a private sector solution that can overcome the Burnham government.

That aside, there is a crucial difference between SAR and the kind of nationalization that Burnham appears to support.

In the former case, the priority is to continue providing water and wastewater services while minimizing losses to creditors, and to restructure the company so that new owners can be found. Under the current structure, L&VW may also be included.

If Mr Burnham instead opts for a full-scale nationalization, it would likely require a parliamentary vote, which could put him in conflict with Thames creditors.

This will be an interesting early test of his resolve to strengthen public management of water and energy. It would also be risky given the reputation of litigation among some of Thames’ creditors.

— Ian King

Video: Britain faces big decisions about the future of North Sea oil
Britain’s energy debate has come back into focus following Keir Starmer’s resignation, with his successor facing major decisions over the future of North Sea oil and gas.

Watch the full interview with John Swinney, Scotland’s first minister, on CNBC.
CNBC’s Ritika Gupta speaks to Scotland’s first minister, John Swinney, about the UK’s change in prime minister, further devolution of powers under a potential Prime Minister Andy Burnham, and the Scottish Government’s first bond issue, known as the ‘Quilt’.

Emergency warning heatwaves are becoming the new normal in Europe. Investors are paying attention
Amid warnings that climate change will make scorching temperatures more common, some investors are rethinking how to prepare their portfolios for the social changes expected to come with future heatwaves.

— Katrina Bishop

July 1: National House Price Index (June)

7 July: Bank of England Monetary Policy Committee Meeting Minutes