Thames Water’s offer to lenders sets a rough precedent for existing creditors to the company, and other creditors in the leaky UK water sector should be worried.
Last Friday, Thames Water asked its creditors for up to £3bn in emergency funding, as it battles for its future.
Some investors have already pledged £1.5bn, and now Thames Water wants to bring others into two tranches of £750m each.
Without the deal, the company could run out of money by Christmas.
The UK government agency responsible for the water sector told GlobalCapital last week that the only thing that was not being considered as a remedy for the coountry's troubled water companies was nationalisation, but other radical options, including making water companies non-profit, are seemingly on the table.
The new loans will pay 9.75% in interest, plus some chunky fees. The first round of lenders that have already agreed to backstop the first half of the deal will get a 3% fee, while any new backstop providers can expect 2%.
This is the kind of last ditch offer that happens when a company is plunged from investment grade rating to CCC+ overnight, as Thames Water was.
Junior version of senior
But the scary part of this deal for creditors is that the new facility will be super-senior: it will rank higher than any other debt in the event of a restructuring or default.
It is difficult to downplay the magnitude of this with a company teetering on the brink of collapse.
The new creditors, including the £1.5bn backstoppers, have now been given the opportunity to lend at up to 12.75% at low risk, as their super-senior position means they will be right at the front of the queue to be repaid if Thames Water goes bust.
Other lenders and bondholders are now shunted down the order. For bondholders this is less concerning, as anyone holding Thames Water bonds by now must have gone into them specifically looking to buy distressed assets and therefore, this is the high risk, high reward game they play.
But lenders have a far less liquid market to enter and exit positions from. The secondary market in syndicated loans is very nearly non-existent.
At the start of this month, lenders agreed to roll over a £410m revolving credit facility for the company.
While Thames Water is by far the worst positioned of all the UK water companies, the entire sector faces severe difficulties.
The sector needs billions of pounds of investment from its shareholders, as well as substantial debt to upgrade and replace creaking infrastructure. The UK water regulator Ofwat has fined all the companies in recent years for pollution, and in August said it was looking to fine Thames Water, Yorkshire Water and Northumbrian Water a combined £168m.
If the Thames Water super-senior deal goes through, other lenders should be starting to sweat that their exposure to the sector isn’t as watertight as they believe.