The creditors trying to take control of Thames Water have hired litigation specialists, a precaution that tells you how seriously they take the prospect of the company being nationalised over their heads.
London & Valley Water, a consortium of 100 institutional investors holding £17bn of the company's £21bn of debt, says it is open to greater government involvement but not to public ownership, the Guardian reported. It has retained the litigation and disputes firm Pallas Partners alongside Akin Gump, which is advising on the restructuring itself.
"Creditors are assessing all potential routes that the situation regarding Thames Water may play out," a person close to the consortium said. "They want, and need, to be ready. There is no legal action being taken at this point. This is purely a precautionary measure."
What is actually at stake
Thames Water serves 16 million customers across London and the Thames valley and is struggling under interest payments on debt accumulated since privatisation. Its future is one of the more pressing items awaiting Andy Burnham in Downing Street.
The mechanism being discussed is a special administration regime, a form of temporary public ownership used when an essential service provider fails. Reports suggest Burnham is planning to place Thames Water into one. He said last month there should be "greater public control" of the company and told the Guardian that could mean nationalisation.
The financial consequence is the crux of the dispute. Under a special administration the cost of running the company transfers to the taxpayer, and Thames Water's creditors put that bill at around £2bn.
That figure is also the government's argument. "If it is going to cost the taxpayer £2bn to keep the company afloat then the taxpayer needs to receive something in return; that means control, so that we can fix the company and secure the water supply for thousands of families and businesses," a Burnham ally told the Sunday Times.
Who the creditors are
The composition of the consortium explains the seriousness of the legal preparation. London & Valley Water includes Apollo Global Management, Elliott Management, Farallon Capital Management and Silver Point Capital.
These are distressed-debt investors, several of them known for litigating aggressively to protect recoveries. Elliott in particular has a long record of pursuing sovereign and corporate debtors through courts across multiple jurisdictions. Hiring Pallas Partners is not a symbolic gesture from this group.
The consortium's stated preference is a solvent restructuring, meaning the company is recapitalised and its debts restructured without entering administration. "This would avoid a taxpayer funded administration process and help creditors recover as much as possible," the person close to the group said. "It can bid alongside any others, but that prolongs everything."
The competing claims
Both sides are making an argument about who should absorb the losses, and both have a case.
The creditors' position is that they are ready to put new money in. "We remain ready and willing to recapitalise Thames Water, return it to investment grade, and begin the long process of turning it around," said Mike McTighe, the corporate troubleshooter leading the governance overhaul and the proposed new board. "We urgently need government engagement to begin that process." McTighe, who chairs BT's infrastructure arm Openreach and previously chaired the Telegraph's publisher, would likely become chair if the consortium's £10bn rescue is approved.
The government's position is that creditors bought this debt knowing the risk, often at a discount, and that a rescue leaving them in control rewards the investors whose leverage created the problem.
The unresolved question underneath is who bears the cost of decades of debt- funded dividends. In a solvent restructuring, creditors take a haircut but keep the upside. In a special administration, the state absorbs the running costs and the creditors' recovery depends on what is left. Neither route makes the losses disappear.
How it got here
This is not the first attempt at a rescue. The lenders have been trying to take ownership and bring the company out of its difficulties since a proposed sale to the US investment group KKR failed last year.
Their plans were then complicated when Emma Reynolds, the environment secretary, wrote to the regulator Ofwat raising concerns about the terms of the deal.
For anyone following the UK water sector, this sits alongside the executive pay and sewage disputes we have covered at other companies. The difference is scale: Thames Water is the largest, its debts are the heaviest, and its resolution will set the template for how a failing regulated monopoly is handled in Britain.
