A second group of Thames Water lenders will this week submit a fully funded £3bn financing package that it will argue is cheaper and more certain than a rival offer endorsed by the company last week.
Sky News has learnt that the water utility’s Class B bondholders – which are reported to include Aviva, BlackRock and MetLife – will table a proposal as early as Tuesday, as the company and its advisers seek to avert what would rank among one of the most significant insolvencies in recent British corporate history.
The group is expected to argue that its offer will be significantly cheaper than one from Class A – or more senior – creditors backed by Thames Water late last week, which included £1.5bn of guaranteed funding and a further £1.5bn of provisional money.
The Class B group is understood to have calculated that Thames Water could save approximately £375m in interest payments and fees over a 12-month period if it chooses its proposal.
Insiders said they had calculated that the Class A group, which includes the American hedge funds Elliott Advisers and Silverpoint, would earn in the region of £650m during that time.
Thames Water chief executive Chris Weston said last week that the Class B group’s proposals, which include funding lent at an interest rate of 8%, were insufficiently detailed to garner the board’s support.
The group is likely to counter that on Tuesday by tabling fully developed loan documentation to the company.
It emerged over the weekend that the Class As’ proposals incorporate a management incentive plan aimed at retaining key Thames Water executives.
While details of that structure are yet to be set out, a person close to the process said it raised questions about a potential conflict of interest that Thames would need to be transparent about.
Any substantial pay packages for water company executives – particularly at one standing on the brink of collapse – would be highly contentious, with the government recently having established an independent review of the industry that will look at far-reaching reforms.
A significant incentive plan would also be controversial given that Thames Water will require forbearance from Ofwat, the industry regulator, in terms of substantial fines and other penalties it is likely to have to pay because of its dire record on sewage leaks and wastage.
It was unclear whether the Class B bondholders’ proposals would contain any similar incentive package for the company’s management.
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While a spokesman for the Class B group refused to discuss details of its loan documentation, he said that Thames Water was “attempting to lock itself into an extremely costly short-term loan, and ignoring more affordable offers of financing it has received”.
“While it’s being positioned as solving the company’s problems, in the long term the opposite is true,” they said.
“The predatory lending rates, lender fees, and conditions being levied will see the company spiral into greater financial and operational trouble and block off the potential for a fair, transparent market-based equity raise, open to all interested investors.
“Thames must at the very least evaluate its options and seek a market-based solution, especially when there is a significantly more affordable alternative £3bn proposal from long-term investors that could give it the runway and flexibility it needs to explore the best long-term path.”
Thames Water declined to comment.
