(Bloomberg) -- Thames Water won crucial support from creditors to move forward with its plan to raise £3 billion ($3.8 billion) in emergency funding.
Holders of more than three-quarters of the beleaguered utility’s senior, Class A debt agreed to the proposal, according to a statement from the company on Wednesday. The fresh money, starting with an initial tranche of £1.5 billion, comes with an annual interest rate of 9.75%.
Surpassing the 75% threshold for one class of creditors meets the minimum requirement to implement the plan via a UK court, but its final approval will depend on a legal ruling. Thames Water is aiming for an initial hearing on Dec. 17.
The emergency funding, if approved, will merely buy the heavily indebted company time to avoid an immediate cash crunch — and a potential temporary nationalization. Alongside its efforts to raise debt, Thames is also urgently seeking 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.
Thames Water and a coordinating committee of Class A creditors, including Elliott Investment Management and Silver Point Capital, devised the latest debt-raising proposal.
“This is a decisive vote of confidence in the first stage of our restructuring plan for Thames Water from a large group of its creditors,” said a spokesperson for the Class A creditor group in an emailed statement. “It shows that there is a genuine will to develop a market-based solution which saves UK taxpayers from shouldering the costs of Special Administration.”
In its statement, the company said that the creditors backing the proposal also support its plan to access up to £400 million of cash reserves. These resolutions will be voted on at a bondholder meeting to be held on Nov. 18. Thames Water added that it’s working on expanding creditor consent further.
Dissenting Creditors
The plan had been criticized by a dissenting group of junior, Class B creditors, who said it would lock Thames into “predatory lending rates.” Moreover some of them, including distressed debt specialists Polus Capital, have presented their own proposal for emergency funding for up to £3 billion, pitching an annual coupon of 8% instead.
A court could still sanction Thames’ preferred plan without the support of the majority of the Class B creditors via a so-called cross-class cram-down procedure. But that would depend on whether the judge believes that approving the deal would be better for the junior group than blocking it.
“The court will have to carefully consider matters such as fairness and alternatives when deciding whether to approve the non-consensual plan,” a spokesperson for the junior creditors wrote in an emailed statement. “The Class B Group will continue to press for a better alternative for Thames Water, which we are confident can and should still be implemented.”
The emergency funding is only the first step to stabilize the situation at Thames. In the longer-term the company has to address its debt stack, which will grow to almost £18 billion if the new money gets tapped.
The utility, which supplies water and sewage services to a quarter of England, is set to run out of cash early next year without a restructuring deal.
--With assistance from Jessica Shankleman.
(adds comment from Class A creditor group in sixth graph, more details on cash release plan in seventh, and comments from Class B group in eleventh)
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