Thames Water bonds plunge to record low as nationalisation threat grows
Thames Water's bonds have crashed to a record low after the Environment Secretary said it was stepping up contingency plans for the struggling utility giant.
The price of Thames Water's debt fell to as low as 67p on Friday, down from 70p at the start of the month, as investors took flight amid fears the Government could nationalise the business.
The market reaction was prompted largely by comments from Steve Reed last Thursday, who said that ministers were preparing to put Thames Water into a taxpayer-backed special administration regime.
He said: 'The company remains financially stable, but we've stepped up our preparations and stand ready for all eventualities, as I've said before, including a special administration regime if that were to become necessary.'
Falling bond prices signal that investors are also now bracing for the nationalisation of Thames Water, which remains on the brink despite a £17bn rescue proposal put forward by more than 100 of its most senior lenders.
Talks are still ongoing over the potential bailout, although uncertainty is mounting after Mr Reed suggested the Government will not waive fines for Thames Water, which is one of the creditors' key demands.
Pressures have also intensified after US private equity giant, KKR, unexpectedly abandoned its bid for the business earlier this month.
Analysis of Thames Water's finances shows that a £250m bond due to mature in 2034 has been one of the hardest hit by the sell-off.
Now valued at 67p, this is down from more than 80p two years ago.
Falling bond prices in Britain's biggest water company will be a source of concern for the Government, which is seeking to attract global infrastructure investors as part of its bid to boost growth.
Utilities are often deemed a safe haven by funds, therefore, the prospect of lenders incurring steep losses on Thames will be likely to damage investor appetite.
There are huge numbers of creditors currently exposed to Thames Water, which has racked up a £16bn debt pile over the past decade, including a raft of different bonds.
A special administration regime (SAR) would wipe out the bulk of Thames Water's borrowings, although it would also leave the Government forced to foot the bill for its running costs.
A previous report estimated that an SAR could cost the taxpayer up to £4.1bn, piling further strain on the Government's stretched balance sheet.
A report from JP Morgan last week said: 'Putting Thames into a SAR would be costly for the government and weaken its already tight fiscal position.
'Also, if Thames Water were nationalised, the Government would inherit all of the company's operational issues and be on the hook for any underperformance.'
As well as billions of pounds in running costs, the creditors have calculated that Thames faces more than £1bn in fines and penalties over the coming years.
However, despite the financial threat posed to investors and taxpayers, there are growing calls for the Government to nationalise Thames Water.
Professor Dieter Helm, an economist and former government adviser, said last week that 'special administration will in the end most likely be necessary, and before 2029'.
'The Government and Ofwat made a major mistake at the outset in not calling in a special administrator,' he said. 'The leading bondholders have little practice experience in running a utility like Thames, and none has previous experience of a long-term major turnaround.
'They will no doubt have opportunities to take the money and run. All of this is likely before the next election, something that the Government should have in mind.'
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