Can troubled Thames Water avoid collapse?

The troubles surrounding debt-laden Thames Water have come under the spotlight again after a representative of the company's largest shareholder resigned from its board.

Michael McNicholas, from Canadian pension fund Omers which owns almost a third of Thames Water's parent company, stepped down on Thursday with "immediate effect".

The move adds to speculation over the future of the UK's largest water company with concern that other key board members will now step away.

Thames Water is saddled with huge debts and it may have to be taken over by the government if it runs out of money.

The water company that supplies clean water and removes waste for a quarter of the UK is, quite simply, drowning in debt.

When the company was privatised in 1989, it had no debt. But over the years it borrowed heavily and is currently £15.4bn in debt.

A large proportion of that was added when Macquarie, an Australian infrastructure bank, owned Thames Water, reaching over £10bn when the company was sold in 2017.

Macquarie said that it invested billions of pounds in upgrading Thames's water and sewage infrastructure, but critics argue that it took billions of pounds out of the company in loans and dividends.

Macquarie sold to Kemble, which is now the ultimate owner of Thames Water. Kemble is owned by some of the biggest pension and sovereign wealth funds in the world, but recently defaulted on debt payments, meaning it is now effectively insolvent.

That matters because it was supposed to pump more than £3bn in new money into Thames.

In March, Kemble shareholders halted a £500m down-payment on that promised cash injection when regulator Ofwat rejected plans to raise customer bills by 40% above inflation over the next five years.

Thames has now gone back to Ofwat with a new proposal, including higher spending on environmental measures.

The firm says it has enough money to keep ticking over till next May, but at some point Thames will need a fresh cash injection.

Regardless of what happens, water supplies to Thames Water's customers will continue as normal.

"Eventually, possibly," the chief executive told the BBC in March. "But that is a way off yet."

The Treasury, the Department for Environment, Food & Rural Affairs and Ofwat have been wargaming a situation in which Thames is put into a Special Administration Regime, which would see financial consultants run the company on the government's behalf.

This happened when energy company Bulb went bust in 2021 and was placed under special administration.

Following Mr McNicholas' departure from the board of Thames, Jim Wright at Premier Miton Investors told the BBC he expected other board members to stand down.

"We know that Kemble defaulted on a debt payment last month because the underlying shareholders were not prepared to inject any more equity and so I think this is the continuation of that process and of the owners simply walking away from the ownership vehicle," he said.

Mr Wright added that special administration was "the most likely outcome in my view”.

But what would that mean for Thames customers and/or taxpayers?

Thames is not making enough money to cover its costs. That means that either bills to customers will have to rise or taxpayers across the UK would have to foot a shortfall that could run into billions if it remains in public ownership beyond next May.

That could be a tough sell to voters outside the southeast of England in an election year.

A possibility. Throughout this crisis, Ofwat has insisted that Thames Water - despite its huge debts - generates £2bn a year in inflation-linked income, which might be attractive to someone.

However, any potential new owner would have to be prepared to make lower - if any - returns on their investment than the current shareholders, who have been pretty patient having not taken any dividends from the parent company since 2017.

Risky. In financial lingo, this is called "taking a haircut". Agreeing to reduced debt repayments from one of the UK's most active borrowers from the financial markets may make other water companies see a rise in their borrowing costs, which would make life harder for other utilities who rely on lenders.

Just like landlords who pass on higher borrowing costs to their tenants, customers of all water companies could suffer if markets deemed the loans to be more risky and therefore make them more expensive.

A likely outcome.

As one person close to the situation said: "We will be having this same conversation in a year's time".

The challenges facing Thames Water are formidable. In Finsbury Park, north London, the company is replacing pipes laid when Queen Victoria was on the throne and the land above was fields. Today it is operating in - and under - built-up urban areas.

One certainty Thames customers can surely bet on is that bills are going to rise.