In spring this 12 months, Elliott Management, the $70bn US hedge fund recognized for circling distressed belongings, alighted on a brand new goal: Britain’s largest water firm.
After scooping up a whole lot of tens of millions of kilos of Thames Water’s debt from panicked asset managers prepared to promote at a reduction, Paul Singer’s Elliott is now one among a number of hedge funds engaged in a tussle over the way forward for the troubled utility.
Elliott, which earned notoriety for seizing a Argentine naval ship throughout a 15-year skirmish with the Latin American nation over its defaulted debt, is within the vanguard of a gaggle of Thames Water’s top-ranking bondholders that has agreed to offer a mortgage of as a lot as £3bn to the cash-strapped utility, which has warned that with out pressing intervention it may run out of cash round Christmas.
The emergency mortgage won’t come low cost. On high of a close to 10 per cent annual rate of interest, the lenders can even pocket substantial charges and stand to realize an extra windfall if Thames Water repays the mortgage forward of its 2.5-year maturity.
Whereas Thames Water has already signed a so-called lock-up settlement with these bondholders and is making an attempt to realize approval for the deal from the remainder of its lenders, a rival group of traders holding the utility’s lower-ranking debt has made a competing offer to offer their very own £3bn mortgage at a decrease 8 per cent rate of interest and with fewer strings hooked up.
The 2 units of bondholders embody massive asset managers similar to BlackRock — which is in each teams by means of investments in individually managed funds — however the competing affords have additionally pitched plenty of specialist distressed debt traders towards each other. Elliott is joined by fellow US hedge funds Silver Level Capital and GoldenTree Asset Administration within the so-called class A bonds and the likes of London-based credit score fund Polus Capital Administration maintain the category B debt.
The truth that the utility, which supplies water and sewerage companies to 16mn clients in and round London, is now host to a battle between a few of the US and Europe’s greatest debt specialists underscores its fall from grace in debt markets.
Thames Water’s close to £19bn of debt was as soon as considered as among the many most secure investments within the sterling company bond market, as a result of regulated regional monopoly’s predictable income stream. However now credit standing companies have downgraded the utility to the bottom reaches of junk.
Whereas each proposed loans have been pitched as short-term options to maintain Thames Water afloat whereas it tries to lift no less than one other £3bn in recent fairness from new traders, some campaigners concern it may saddle the corporate with much more costly debt to the detriment of its clients.
Feargal Sharkey, the previous rock musician who now campaigns for cleaner water in Britain and is fiercely essential of trade regulator Ofwat, stated that “clients would pay for this as extra of their payments get eaten by savage lenders”.
“Ofwat appears content material to permit Thames Water’s debilitated corpse to implode below even but extra debt,” he stated, “whereas the vulture capitalists and banks look on, licking their lips, anticipating a fast buck.”
A spokesperson for the category A bondholders stated that about 70 per cent of their group is “long-term, actual cash traders in UK infrastructure”, that their mortgage provide “is open to all collectors” and that they need to “give Thames the very best alternative to draw the brand new fairness it wants and permit for a full recapitalisation and profitable turnaround”.
A spokesperson for the category B bondholders stated that their financing provide was “drastically cheaper, extra versatile and extra substantial than the costly mortgage proposed by the category A [group]”.
Ofwat stated: “’We now have been pushing Thames Water to make important enhancements in its operational efficiency and monetary resilience for a while.”
“The corporate has made a request for a considerable improve in expenditure as half of the present worth evaluate course of. We’re reviewing that request and the supporting data offered, and can announce our last choices in December.”
Folks near the category A bondholders argue that their general deal will reduce the corporate’s instant debt compensation burden, attributable to a maturity extension that Thames Water would concurrently acquire from lenders, whereas liberating up a whole lot of tens of millions of kilos of money at the moment trapped in reserve accounts.
The curiosity on the brand new debt can be funded from the proceeds of the mortgage itself fairly than buyer payments, these individuals additionally claimed.
However it is usually true that there’s the potential for immediate earnings to the funds that take part: merchants have already began quoting conditional costs on the brand new debt displaying that they’ll purchase and promote it effectively above face worth.
The category B bondholders, in the meantime, have stated that Thames Water has not given a good listening to to their provide, which they estimate may save the utility a whole lot of tens of millions of kilos.
“They stated ‘it’s all too little too late’,” one bondholder stated.
Credit score funds similar to Sculptor Capital Administration and Marathon Asset Administration are among the many funds which have offered commitments to fund the category B group’s mortgage, in accordance with individuals conversant in the matter.
Sculptor declined to remark. Marathon didn’t reply to a request in search of remark.
Zimmer Companions — a US funding agency that specialises in utilities and infrastructure — is among the greatest funders of the rival mortgage provide, the individuals added. The New York-based agency has expertise in offering rescue financing to distressed utilities, having offered $675mn of fairness to bankrupt Californian electrical energy firm PG&E in 2020.
PG&E’s chapter additionally prompted a tussle between hedge funds that noticed Elliott and Zimmer sit in opposing camps, with the previous agency unsuccessfully pursuing authorized motion towards the corporate for allegedly snubbing Elliott from collaborating in a $2bn fairness elevate.
Elliott and Zimmer additionally declined to remark.
Whereas there are heavyweight corporations on either side, the category B bondholders are relative minnows in Thames Water’s debt stack, accounting for £1.4bn of its borrowing versus £16bn of sophistication A debt. The category A bondholders can be paid forward of any class B if the utility had been to change into bancrupt, whereas the brand new mortgage would rank forward of each lessons of present debt.
Despite the fact that the category B bondholders are providing cheaper phrases, their proposed mortgage would nonetheless want approval from class A bondholders. This might show a sticking level.
The category B group stated on Thursday that it was calling on “the entire firm’s different collectors to assist this dedicated financing [ . . .] fairly than needlessly paying lenders curiosity on costly debt with cash that might be spent investing within the water and wastewater provides of London and the Thames Valley”.
If both mortgage goes by means of, it can permit Thames Water to maintain working whereas Ofwat agrees a five-year regulatory settlement over buyer payments, which is predicted to be introduced in December or early January.
It would additionally give the utility respiratory room to doubtlessly problem the regulator with the Competitors and Markets Authority if the settlement disappoints. The corporate has requested for a 53 per cent improve in payments by 2030.
“In the event that they elevate £3bn debt, this could get you to the opposite aspect of any CMA referral, so the can could also be effectively and actually kicked down the street,” stated Dominic Nash, an analyst at Barclays.
The fairness course of is being run individually by Rothschild with last bids due early within the new 12 months. Potential bidders together with Castle Water, which already handles Thames Water’s enterprise clients, and US personal fairness agency KKR are finishing up due diligence on the deal, in accordance with two individuals conversant in the scenario.
Some have argued that an onerous new mortgage or a messy dispute between bondholders may make Thames Water much less interesting to potential traders, nonetheless.
“If that exploitative deal is agreed we will certainly contemplate strolling away,” stated one potential fairness investor.
The bondholders declined to remark. Thames Water didn’t reply to a request in search of remark.
However whereas the 2 teams of bondholders are at odds over which mortgage deal goes by means of, they’re unified of their willpower to keep away from the renationalisation of Thames Water below the federal government’s particular administration regime.
With any new funding from the federal government rating forward of their debt in that course of, particular administration would have the potential for inflicting massive losses even on hedge funds that scooped up Thames Water’s debt for pennies on the pound.
