Thames Water’s financial troubles rumble on: Thames Water’s board is currently weighing up two refinancing offers with a view to keeping the company afloat. The board’s preferred option (“Plan A” from Class A bondholders) has a 9.75% interest rate and will cost £200m in fees, whereas a more recent (arguably cheaper) “Plan B” proposal from Class B bondholders purportedly offers “more money on less onerous terms”. Market reports are that this new funding will provide a bridge to a further restructuring, and that Thames Water’s existing shareholders will ultimately be replaced via a debt-for-equity swap, allowing for the transfer of ownership of the troubled water company to its lenders. 

While a debt-for-equity swap could be a saving grace for Thames Water, it raises concerns around governance in the intervening period while funding is sought in the shorter term. Current shareholders have written off their investments and are disengaged, creating a governance vacuum for the UK’s largest water provider. The Financial Times has now looked at the potential lacuna which results in a company considering such refinancing plans when its shareholders are clearly “out of the money”. Ordinarily, shareholders would be able to hold the directors accountable for their decisions, such that the directors would need to justify opting for the more expensive Plan A (if chosen) and to ensure the best outcome for the company (and thereby its customers). But where there is clearly no value left in the equity (with the Financial Times reporting earlier this year that the existing shareholders declared it to be “uninvestable”), there is no motivation for existing shareholders to play an active role in holding the board to account. This crucial oversight is lacking.

The unenviable position facing Thames Water is by no means unique: several other water companies are also facing serious financial pressures, including South East Water and Southern Water. It remains to be seen, therefore, whether the regulator or government will seek to grant further protection for customers in the absence of shareholders taking an active role in these essential (but financially unstable) service providers.