(Bloomberg) -- Thames Water Utilities Ltd. unveiled a plan Friday seeking to raise up to £3 billion ($3.9 billion) from some of its creditors as it struggles to stave off insolvency while negotiating a lasting solution.
The UK’s largest water and sewage provider said it wants to borrow more money and extend existing debt due to mature next year. It also wants to access cash reserves to avoid running out of operating capital by early next year.
Without new funds and a restructuring of its debt load of around £16 billion, the utility would likely be temporarily nationalized. Existing investors want to avoid that because a prolonged period under government control could mean they recover less of the money they lent.
Thames Water needs the fresh debt to avoid an immediate cash crunch while it searches for a separate £3.25 billion in equity to fix chronic leaks and sewage spills, as well as cope with a growing population and climate change.
Castle Water Ltd., which serves business customers, is in talks to inject equity into Thames, with a view to owning a majority stake in the business, according to a person familiar with the matter. Castle Water’s interest was first reported by the Financial Times.
Alongside the equity raise and the fresh debt, Thames also needs to reach an agreement with its creditors over how to put its massive debt pile on a more sustainable footing. The company faces competing demands from rival groups of creditors, holding debts of differing seniority.
Under Friday’s proposal, Thames is seeking to obtain up to £3 billion in so-called super senior funding, made up of an initial tranche of £1.5 billion. The cash would last through to October 2025, giving the company more time to negotiate with investors. The new money will pay annual interest of 9.75% and will come with an original issue discount of 3% to make it more attractive to debt investors.
The beleaguered utility said the plan currently has the backing of around 40% of its creditors, representing about £6.7 billion of its debt pile. It needs the support of 75% to approve the proposal by a deadline of Nov. 19.
Most of those supporting the plan are holders of its more senior-ranked, Class A debt who have coordinated in a group advised by Jefferies Financial Group Inc and Akin Gump Strauss Hauer & Feld LLP.
The coordinating committee of that creditor group includes Apollo Global Management, DE Shaw & Co, Elliott Management Corp and Sona Asset Management, as previously reported by Bloomberg News. The committee also includes Diameter Capital Partners, Pacific Investment Management Co. and Silver Point Capital, according to people familiar with the matter, who spoke on the condition of anonymity.
Representatives for Diameter and Silver Point declined to comment. A spokesperson for Pimco didn’t immediately respond to a request for comment.
“Today’s news demonstrates further progress to put Thames Water onto a more stable financial footing as we seek a long-term solution to our financial resilience,” said Thames Chief Executive Officer Chris Weston, in a statement accompanying Friday’s proposal.
Time is not on Thames’s side. It may struggle to raise new equity until it receives a key decision from regulator Ofwat on the industry’s price controls for the next five years, including the rate of return for investors. That decision is due on Dec. 19 but could be pushed into January because the general election in the UK this year delayed the process.
The proposal announced today could buy Thames more time to raise equity in the new year once it has Ofwat’s ruling.
Under Friday’s proposal, the firm could further extend the maturities of some existing debt to May 2026 if it decides to make an appeal to the Competition Markets Authority against Ofwat’s final determination. That process could take as long as a year and cost millions of pounds and there’s no guarantee that Thames would secure a better outcome.
If it does go to the CMA, Thames could also access a further £1.5 billion across two tranches of £750 million, the statement said.
Rival Plan
With cash reserves of just £500 million, Thames needs cash urgently. The proposal announced on Friday is one of two that seek to provide cash to stave off the insolvency of the company in the near term.
Some holders of Thames Water’s riskier, Class B debt drew up a rival plan ahead of Friday’s announcement to provide the utility with a loan of least £1.5 billion ($1.9 billion), Bloomberg reported on Thursday.
The group, represented by lawyers at Quinn Emanuel Urquhart & Sullivan LLP, pitched new funding of over £1.5 billion to Thames Water. They offered fresh debt at an annual coupon of around 8%. The group of Class B holders quickly came together after splitting from the Class A group last week.
The company’s second-lien debt is roughly £1.4 billion, a fraction of the almost £14.8 billion of Class A debt in the firm’s capital structure, according to the company’s presentation to investors in July.
“We considered what they said extremely seriously and we will carry on talking to them and I hope we will get their support for the proposal that’s on the table today, ” Alastair Cochran, Thames’ Chief Financial Officer, said in a press conference on Friday.
The utility’s latest plan was welcomed by Ofwat which said it is a “positive step towards extending its liquidity runway and seeking a market-based solution to the company’s problems”.
They added that “safeguards are in place to ensure that services to customers are protected, regardless of the issues faced by Thames Water.”
--With assistance from Laura Benitez.
(Adds detail on Castle Water equity interest in paragraph 4)
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