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Thames Water’s biggest creditors have told Britain’s water regulator that a proposed £3bn emergency loan cannot be used to pay fines.
British the largest water companywhich derives all its revenue from its 16 million customers, has calculated that it will face fines totaling around £400m by March 2027, according to documents seen by the Financial Times. Penalties expected next year alone include a £44m fine for allegedly paying excessive dividends and a further £135m in environmental charges for sewage pollution.
Problematic utility service secured an emergency loan last month worth as much as £3 billion from its biggest creditors — which include US hedge funds such as Elliott Management, along with British asset managers — to help it avoid re-nationalisation.
Creditors say the loan is intended to support Thames Water’s operations, continue capital investment and give confidence to its supply chain. But they have insisted to both the utility and Ofwat that they will not allow the proceeds of this loan to be used to pay financial penalties, according to people familiar with the discussions.
The creditor intervention comes as Thames Water prepares for a crucial High Court hearing this month, where it hopes to agree a loan to avoid a Christmas cash crisis.
The specter of fines has made Thames Water’s negotiations with creditors behind its £19bn debt pile increasingly strained, as lenders argue the company needs “breathing space” from regulatory fines to stabilize its business.
Representatives both the utility and these creditors told Ofwat that agreement on the size and timing of the fines was considered essential. They argue the fines could immediately wipe out a significant portion of his dwindling cash, according to people familiar with the situation.
One proposal pushed by Thames Water and its creditors was for Ofwat to consider ways of collecting these fines that did not require immediate cash payments, the people added.
Uncertainty over the utility’s overall exposure to fines could also undermine parallel plans to raise billions of pounds of capital, people familiar with the discussions said.
Castle Water, the company founded by Conservative party treasurer Graham Edwards, is in talks to take a majority stake in Thames Water, FT reported in October. CK Infrastructure, which owns Northumbrian Water, is also in discussions about a bid.
Debates over the fines highlight the delicate balancing act Ofwat must undertake as it tries to clamp down on failings by water companies amid widespread public anger, while maintaining accounts at a sustainable level for customers. At the same time, the regulator must try to prevent water companies from sinking into a separate administration.
The agreement to reduce the immediate burden of fines was originally expected to be a feature of the “special turnaround monitoring regime” that Ofwat unveiled for Thames Water in July.
Although Ofwat’s final announcement made no mention of such an arrangement, Thames Water did not paid any fines more than a year, with fines for alleged breaches of dividend rules last year still under consultation.
Ofwat has backed Thames Water’s £3bn emergency loan as a “positive step” towards a “market-based solution to the company’s problems”, but the financial arrangement has sparked controversy due to its high costs and onerous terms.
As well as charging interest of nearly 10 per cent and other costs that could be as high as £800m, the lenders will pour monthly loan proceeds into the utility to protect themselves in the event of a special administration.
Thames Water is also under fire over adviser fees, including creditors’ adviserswhich is expected to amount to hundreds of millions of pounds.
Creditor talks with the utility company have been dubbed the Willow project—a nod to the thirsty tree that grows along bodies of water.
Thames Water has faced criticism from its junior bondholders for not considering alternatives to expensive financing, after the utility rejected their £3bn loan offer at a lower cost and with fewer conditions as too difficult to implement.
Ofwat said it would “continue to hold all water companies to account”.
The watchdog added: “Last year we fined the sector £158m for poor performance. In August, our investigation into Thames Water in relation to the management of their wastewater treatment works and networks led us to propose an enforcement penalty of £104m.”
Thames Water and its creditors declined to comment.
