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Thames Water’s parent company has sent a formal notice to bondholders informing them that it has defaulted on its debt, firing the starting gun on a potentially messy restructuring at the owner of Britain’s largest water utility.
On Friday, one of the holding companies that owns Thames Water announced that interest payments due earlier this week on a £400mn bond “have not been paid” and it issued a “formal notice of default”.
The bonds were issued by Kemble Water Finance, which sits above the nearly £15bn of debt at the Thames Water utility companies. Those companies should be unaffected by the move. Kemble last week told bondholders that it intended to stop paying interest on bonds.
The default threatens to wipe out the stakes of Thames Water’s nine shareholders, which include the Chinese and Abu Dhabi sovereign wealth funds as well as Canadian and UK pension funds. The shareholders last week said that actions by water regulator Ofwat had made the company “uninvestable”.
The latest financial setback casts further uncertainty over a business that has become a political flashpoint due to widespread public anger over sewage discharges and the service record of the privatised utility.
Kemble has appointed restructuring adviser Alvarez & Marsal to aid its discussions with creditors and said that it had begun approaching lenders “to request that they take no creditor action so as to provide a stable platform while all options are explored with all key stakeholders”.
The Financial Times revealed on Thursday that Kemble’s creditors include two Chinese state-owned banks, which are part of a group of lenders that were involved in a stand-off over extending a £190mn loan due at the end of the month.
Thames Water requires substantial investment to overhaul its ageing infrastructure and its shareholders last week announced they were backtracking on a prior commitment to provide £500mn of fresh equity.
While Kemble’s creditors could theoretically look to take over the company through a debt-for-equity swap, the substantial investment required could make it an unappealing prospect for lenders. Kemble’s £400mn bonds are trading at little over 15 per cent of their face value, indicating that debt investors are braced for a near-total wipeout.
Thames Water’s management has long insisted that Kemble’s travails should not have an impact on the regulated utility, which they say has £2.4bn of cash and access to other overdrafts that will allow it to continue operating until 2025.