Thames Water sinks further down the drain

While the chancellor is desperate to avoid taking on Thames and busting her own Budget, there is a way forward that bond market investors would understand.

via Unsplash

Another day, another outpouring of waste product from Thames Water. This week the recipients were not the usual rivers and beaches, but a slightly different effluent from the chairman and chief executive of the company in front of the environment select committee.

Well, not so very different, really. Successive CEOs at the company have become adept at blaming their predecessors, pleading poverty and claiming that things are improving (“turnaround” was le mot du jour this time). Chris Weston is the latest in line. To be fair, the inevitable media fury at his pay successfully distracted the coverage of the key question, which is: how much of a haircut on their loans should the bondholders take to restore financial stability?

It was not something that the chairman, Sir Adrian Montague, was keen to address. He is usually described as a City grandee. His most recent starring role, five years at Aviva, was not a roaring success, and he can claim to have been in the top seat at Thames for only two years. Confusingly, he resigned as chairman of Thames’s parent company, Kemble Water, in February last year.

The pair may be battling for the company, but there is little evidence of their doing the same for the customers or the rivers on their huge estate. Thames needs a minimum of £4bn in risk capital now to have a chance of improving its dismal record on pollution, and a more robust pair at the top might have recommended the most obvious source of the money - the bondholders themselves.

For current purposes, there are two classes of holders owed about £20bn between them: the top tier, braced for a haircut on their bonds, and the lower tier, screaming blue murder but likely to be (almost) wiped out. The government is keen not to get involved: The Guardian revealed that HM Treasury has told the environment department to find the £4bn from its budget of £4.6bn, which at least proves that the bean-counters have a sense of humour.

While the chancellor is desperate to avoid taking on Thames and busting her own Budget, there is a way forward that bond market investors would understand. The company is in gross breach of its licence, so it could easily be revoked, and the state take over the business. The precedent here is Bulb, which failed when the gas price shot up. At the time, estimates for the cost of the government rescue went as high as £3bn. In the event, the price came down, and the rescue cost the taxpayer almost nothing.

A similar Special Administration, with a pledge to float Thames Two on the stock market with a modest debt burden, would follow this useful precedent. The proceeds of the flotation would all go to repaying the defaulted old debt. If that was, say only 30 per cent, too bad. The lenders should not have lent to a business which has been overborrowed for a decade. Thames Two would then have the resources and financial strength to start the task of cleaning up its thousands of miles of rivers, crumbling sewage works and leakages.

Meanwhile, the lenders would doubtless complain about the damage to the City’s reputation, while spending still more on London’s finest lawyers. They may also have learnt to take more care in future before advancing billions to a failing company. The bad news, though, is that we are going to have to pay a lot more for clean water, rivers and beaches, whether through direct bills or taxation. Complaining about Mr Weston’s salary is merely displacement activity.