(Bloomberg) -- Britain’s water industry is bracing for the biggest overhaul since privatization in 1989 amid a scandal over systematic sewage spills and chronic pipe leaks. After decades of underinvestment, it’s customers who will shoulder the cost of fixing the problems through the biggest ever bill increase for households and business.
The crisis follows decades of poor regulatory oversight that allowed company owners to pay themselves billions of pounds in dividends instead of using the money to maintain the infrastructure.
Things have got so bad that Thames Water Utilities Ltd., which serves a quarter of England, is in talks to restructure its heavy debts to avoid falling into temporary state ownership.
What’s gone wrong?
UK water utilities have enjoyed a rock-steady stream of income from bill-paying households and businesses, but many of them are laboring under debt racked up by the international investment funds that own them.
The owners of Thames Water, for example, used a structured financial product called a whole-business securitization model that allowed them to pile debt on the company and pay themselves more in dividends. This practice was encouraged by a flawed framework of incentives known as the “managed price system” devised by regulators.
Why is Thames Water in trouble?
Thames Water has the highest ratio of debt to equity of any UK water company, and fines imposed by regulator Ofwat over poor performance have worsened its predicament.
What’s more, over half of Thames Water’s debt and derivative-linked liabilities were inflation-linked as of September 2023, according to credit rating firm Moody’s. As a result, its debt servicing costs soared when UK inflation jumped following the pandemic.
When there was a public outcry over the widespread pumping of raw sewage into Britain’s waterways, it jolted Ofwat into trying to tackle the root cause — decades of underinvestment.
Thames Water, the UK’s largest water and sewage company, has the worst record in England and Wales for chronic leaks, and faces one of the biggest cleanup bills. Thames says it needs to spend more than £24 billion through 2030 to fix leaks, boost sewage treatment capacity and make the country’s water network more resilient to the weather extremes caused by global warming, paid for through higher bills for consumers.
The sewage scandal led its chief executive to quit in 2023, and her replacement is trying to find a way to fix Thames’s money problems without having to surrender control to the government.
Thames needs at least £3.3 billion in new equity to help finance its next big business plan. But so far only a few potential investors, including Castle Water Ltd. and Covalis Capital, have put forward concrete proposals. Others have been hesitant to commit to a rescue until there’s more clarity over the company’s balance sheet.
Thames has asked Ofwat to allow it to make a return on equity of almost 6% — matching what is available for energy infrastructure investments in the UK. But Ofwat set it at 5.1%, and this may not be enough to attract the new funding it needs.
What tipped Thames Water over the edge?
Dividends have been a major problem. In April 2023, Ofwat changed the rules so that poorly performing companies aren’t allowed to pay dividends. Thames has said it doesn’t pay external dividends, but it did make payments to its parent company Kemble Group to service its debt. Those have now been cut off, meaning Kemble no longer has a source of income. Ofwat says it doesn’t distinguish between external and internal dividends, and doesn’t want customer money used to service parent company debt. So it’s fined Thames and is clawing back some of the payments.
Matters came to a head in March 2024, when Thames’s current shareholders refused to inject £500 million of cash into the business, saying the conditions required by Ofwat made the plan “uninvestible.” A week later, Thames Water’s holding company defaulted on about £1.4 billion of debt after failing to make an interest payment. In May, Thames’s biggest shareholder wrote off the entire value of its stake and one of its managing directors quit the board.
What does it all mean for water bills?
To dig itself out of trouble, Thames wants to charge its customers more. Under a plan set out by Ofwat on Dec. 19, the company will be allowed to increase average annual customer bills by 35% to £588 per household, well below the £667 proposed by Thames. The increases are unlikely to go down well with consumers struggling with the rising cost of living, and with trust in water utilities at a low.
How much debt did Thames Water take on?
When Thames Water was privatized in 1989, its slate of debt was wiped clean. Its indebtedness remained below the industry average until it was acquired in 2006 by Kemble, a consortium led by funds managed by Australia’s Macquarie Group. Macquarie’s use of the securitization model pushed the company’s debt above that of peers, and in following years the gap widened further.
Thames Water’s debt has now been downgraded to “junk” status, which may trigger a default event. That would restrict the company’s ability to borrow more and increase the likelihood of a financial restructuring. To avoid this, Thames has been placed under extra scrutiny by Ofwat, which appointed an independent monitor to examine its financial plans.
How does the securitization model work?
Thames Water’s owners monetized its valuable infrastructure and steady income stream by creating shell companies that then issued debt to be serviced using money siphoned from the core business. The operating company also issued debt regularly over the years, partly to finance investments in the network.
Critics of privatization say the system allowed companies to make billions of pounds in profits while allowing the nation’s water infrastructure to lapse into disrepair. They say successive governments failed to act as Thames Water dragged its feet on infrastructure spending and debt ballooned.
Are other water companies at risk?
Ofwat uses a metric known as capital gearing to measure how much debt different water companies have as a proportion of their regulated capital base, and to judge whether a business is on a firm financial footing. Southern Water Ltd. is not far behind Thames. The company has said it will raise £900 million of equity from shareholders to support its investment program.
The industry’s debt problem could get worse given the pressure it’s under to boost spending. Ofwat has approved industry plans to spend £104 billion between 2025 and 2030 on the biggest modernization of sewers since the Victorian era.
Will Thames Water be nationalized?
Thames must cross several financing hurdles to avoid being brought temporarily into state ownership. In February, a court it could take on an emergency loan worth as much as £3 billion, giving it more time to negotiate a broader debt restructuring.
There’s little appetite in the government to take Thames Water back into full state ownership as this could suck up taxpayer money that might be used to fund other priorities. The government is working on a longer-term industry overhaul that would boost investment and tighten oversight of how customer money is invested.
--With assistance from Giulia Morpurgo and Lucca de Paoli.
©2025 Bloomberg L.P.
