(Bloomberg) -- As if Thames Water’s restructuring wasn’t complicated enough, banks that signed derivative agreements with the utility company have formed yet another group to negotiate with the beleaguered firm.
The group consists of lenders that entered into these contracts with Thames Water before its current difficulties, with those swap liabilities valued at around £1.3 billion ($1.7 billion) in March. The banks have hired advisors at Simpson Thatcher & Bartlett LLP to form a creditor group that will negotiate with Thames separately from other creditors, according to a document seen by Bloomberg News.
Last month, Moody’s said its Caa1 rating of Thames’ Class A notes — toward the bottom end of the junk spectrum — reflected the utility’s super-senior obligations which “could further reduce cash flows available to service Class A creditors.” The derivative liabilities would even outrank the new rescue financing Thames is currently seeking.
One of the banks sent a termination notice to Thames in August for repayment of a £65 million obligation by the end of this month, according to filings. That’s resulted in Thames asking its other creditors for permission to boost its liquidity by releasing money currently ring-fenced for derivative commitments.
A spokesperson for Thames Water declined to comment. A representative of Simpson Thatcher didn’t immediately respond to a request for comment.
Derivatives are commonly used as a hedge by companies whose revenues are tied to inflation. A typical deal involves a company like Thames Water drawing up an agreement with a bank that effectively swaps the fixed-rate coupon on one of its bonds for an inflation-linked coupon, transferring the risk from price fluctuations from the firm to the lender.
While water companies like Thames report the notional and mark-to-market value of their derivative obligations, they don’t count toward official debt metrics so little attention has been paid to them until now.
Thames is currently in the process of raising emergency funding that will help it avoid an imminent liquidity crunch and buy time to restructure more than £15 billion of outstanding debt. The firm’s Class A creditors have already broken away from Class B creditors in the debt negotiations because the groups have different expectations around the outcome of a potential deal.
“The super-senior swap liabilities could impact the recovery of senior debt,” Yeshvir Singh, a senior director at Fitch, said in an interview. “This has understandably caused concern among some investors.”
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