Thames Water Initiates Debt Optimization with Bond Buyback and New Issue

Thames Water, grappling with a significant debt burden, has announced a strategic move to buy back its outstanding Class A bonds, due in June 2025, through a tender offer. This decision aligns with the company’s objective to optimize its debt maturity profile. Additionally, the water supplier to London and South England is planning to issue new fixed-rate notes, with sources informing Bloomberg of an anticipated coupon rate set at 350 basis points above the UK gilt benchmark. However, the pricing details of the new notes are yet to be confirmed by Thames Water.

This financial maneuver arrives at a critical juncture for Thames Water’s debt situation, which has been a subject of concern. A substantial portion of the existing debt can be traced to the era of Macquarie’s ownership when the company’s debt escalated from £3.2 billion to £10.5 billion. Macquarie has faced scrutiny for extracting significant dividends during this period, which is believed to have exacerbated the debt issue.

In 2023, the company witnessed a stark 54% drop in profits to £245 million for the half-year ending in September. Concurrently, its net debt increased by 7% to £14.7 billion, approximately 80% of the company's total assets. Over the past year, Thames Water's valuation has reportedly diminished following a write-down by its second-largest investor.

In response to its precarious financial state, Thames Water obtained £750 million in emergency funding from shareholders in 2023. This funding is aimed at stabilizing the company's balance sheet until 2025, albeit falling short of the £1 billion initially targeted. Ofwat, the utilities regulator, has suggested that Thames Water’s recovery requires more than this infusion of cash, pointing to the need for additional equity to reduce the company’s leverage.

Key Points:

• Thames Water's tender offer for bond buyback and plans for new note issuance.
• The company's historical debt issues and recent financial performance.
• Shareholder funding and regulatory suggestions for a sustainable financial turnaround.