Thames Water: drowning in debt 

• When privatised in 1989 under Margaret Thatcher’s conservative government, Thames Water had no debt – it now has £14.7bn worth in loans, c.80% of the whole business
• An estimated 585 million litres are leaked from Thames Water pipes a day, roughly 234 Olympic swimming pools
• Kemble, the parent company of Thames Water is officially insolvent having defaulted on the interest payment of a £400m loan

From this years Boat Race’s unique safety warning to avoid the water for risk of E.coli to pipes in Finsbury Park just being replaced from when Queen Victoria was our monarch, the problems facing Thames Water are formidable. Not only is it drowning in debt, but it’s also not providing a good enough service – and in the last year has been fined over £100m by Ofwat (the water regulator).

A large proportion (£11bn) of the debt was built up during the 11 years it was owned by the Australian investment bank Macquarie and in that time they paid out £2.7bn in dividends – but higher interest rates in the last few years have caused it to balloon further as c.60% of it is index linked.

Thames Water turned to its international shareholders to find the necessary funds (c.£1bn) to service its debt last year and an agreement was struck that support would be provided, but this was crucially subject to Ofwat setting the allowed returns at a level that ensured the investment’s viability to shareholders. In a turn of events, this condition was not met in late March, rendering the business uninvestable by its shareholders.

With a poor environmental and social reputation of leaks, sewage contamination and executive pay only making matters worse – the business may only have a few viable options to stay afloat.

Thames Water vs FTSE 100 over five years

Source: Refinitiv

So, what might happen?

The tap won’t run dry, but it remains unclear who will pay for Thames Water’s troubles. Shareholders of the company now believe that cash should be stumped up by consumers of the service in the form of hiking prices by 40%. Though Ofwat have refused this for now, and due to the sheer scale of its debt problem, it makes tapping the private debt market unlikely.

That leaves the UK taxpayer, though with the expected election this year we can’t imagine it would prove a very popular call. The shortfall could run into billions, and it would be especially tough to convince voters outside of the southeast of England since their water is supplied by other companies.

Michael Gove, the community’s secretary recently said “The leadership of Thames Water has been a disgrace. I think for years now we have seen customers of Thames Water taken advantage of by successive management teams that have been taking out profits and not investing as they should have been.”

Bowmore portfolios

Though the woes of Thames Water are causing concern here in the UK, good examples of water utilities can be found elsewhere – and we allocate to this theme globally via the Regnan Sustainable Water and Waste fund within the ESG buy list. Since its purchase last year, the fund has returned 14.22%.

An example of the business profile that the fund invests in is American Water Works, which serves 1,600 communities in 16 US States offering its services to residential, commercial and industrial customers, generating income from regulated contracts with pass-through clauses for costs and investments that provide for strong visibility of earnings and cash flows. Growth in the company is forecasted to stem from increasing outsourcing activity as municipalities struggle to keep up with stringent water regulations. Meanwhile, the defensive nature of its business potentially provides for resilient returns.





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