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One check in journalism is whether or not you may efficiently clarify the story you might be writing to your mom. In enterprise management, it’s whether or not you stand an opportunity of explaining your self to a parliamentary committee who’re out for blood.
Good luck to Thames Water, then. The debt-laden utility will this week face MPs to clarify why a £500mn fairness funding from shareholders got here into the group within the type of a convertible mortgage, paying 8 per cent curiosity.
The reply — which judging by Thames Water’s recent letter to the choose committee appears to be: our non-public fairness homeowners want to place in fairness within the type of loans and, really, it doesn’t matter anyway — might meet with some scepticism. The listening to may also take a look at the current fee of £37.5mn in dividends from the water firm’s regulated working firm up into the higher reaches of its convoluted financing construction. That is significantly essential to the way forward for an organization that more and more seems to be in a downward spiral.
The corporate has some extent on the funding. Even if the shareholder mortgage is clearly a legal responsibility within the prime holding firm accounts, and enters the Thames Water working firm as a compensation of an “intra ringfenced group mortgage”, it’s fairness the place it issues — on the working stage. It’s handled as such by credit standing companies. Personal fairness likes to make the whole lot as difficult as doable, usually for tax causes. On this case, some tiny sliver of seniority might have appealed given Thames’s dire straits.
Buyers in Thames’s long-term debt on the working stage, like pension funds, are unlikely to have considerations: buyers within the ringfenced entities that make up the working group are protected against no matter shenanigans go on above within the holding firms. None of this actually makes it simpler to clarify to politicians or the general public, nevertheless — which is a matter whenever you’re an enormous utility supplying a primary human useful resource.
Extra importantly, you may’t detach Thames’s unwieldy company construction from the corporate’s predicament and the regulatory failures that bought it right here. The convoluted set-up is a legacy of former proprietor Macquarie and different ex shareholders’ extraction of worth utilizing debt raised from the holding firms. That debt, principally at what known as Kemble Water Finance, is serviced utilizing dividends despatched up from the regulated working firm, therefore the £37.5mn.
Thames Water factors out that its present homeowners haven’t obtained an exterior dividend for a number of years (or curiosity funds on their shareholder loans). The homeowners don’t plan to obtain dividends or related funds till a minimum of 2030.
However simply as fairness into the working group is arguably fairness no matter its origin, dividends are sucking money out of the utility no matter the place it finally ends up. KWF does have a working capital facility however, basically, the circulate of dividends up from the working firm to pay its money owed is what’s protecting the present on the street. And that’s getting more durable.
This definitely demonstrates the nonsense of a regulatory strategy that centered solely on the working firm and didn’t look additional up the chain at financing, debt, and construction. As Ofwat belatedly will get harder, these are in ever-greater battle.
New licence situations require firms to think about clients and the setting earlier than paying dividends. From April 2025, the beginning of the brand new five-year regulatory interval, the credit-rating set off that may lock up money within the working entities will probably be tightened, elevating the danger that Thames’s holding firms gained’t be capable to service their money owed.
Shareholders have made additional fairness injections conditional on that subsequent regulatory framework. Thames has requested to extend clients’ payments by 40 per cent, is grappling with rising prices and mounting penalties (which it desires capped), in addition to dealing with large funding wants and being lumbered with an more and more unsustainable monetary construction.
Think about this: in its marketing strategy, Thames expects “money influx from fairness financing” of £3.22bn over 5 years. On condition that solely £2.5bn is assumed to come back from its shareholders, factors out Martin Younger at Investec, the rest (which the corporate says is “purely indicative”) comes from further debt offered by Kemble Water Finance.
That Kemble debt will incur curiosity, which implies extracting extra in dividends from the working firm. Certainly, within the marketing strategy, dividends rise from £45mn within the 2022/23 yr to £230mn yearly by 2029/30. Over the course of the 5 years, dividends complete £936mn in a interval the place the corporate has scaled again its plans to spend money on ageing belongings and stem air pollution due to “financeability constraints”.
Name it what you need. That will appear to be an issue.
helen.thomas@ft.com