Introduction: UK water sector faces biggest crisis since Thatcher

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Britain’s model of privatised utilities is facing its biggest crisis since Margaret Thatcher was selling off the family silver in the 1980s.

Thames Water, the UK’s latest water company, is in emergency talks with the water regulator Ofwat, ministers and government departments, amid concerns it needs a multibillion cash injection to keep operating.

The water company, which serves 15 million customers, could be put into temporary national ownership by ministers to secure a refinancing package.

A map showing Thames Water’s

Yesterday, Thames Water said it was working “constructively” with its shareholders on injecting more equity into the company, to support its “turnaround and investment plans”.

Thames Water’s shareholders injected £500m in March, and had committed to a further £1bn in funding, but it is understood discussions about further funding faltered after the board was warned billions more would be needed.

Estimates presented to ministers and regulators suggesting the company could be facing a hole of £10bn in its finances, the Guardian revealed last night.

Thames Water has accrued a £14bn debt pile – around a quarter of the privatised water industry’s collective debt burden of £60bn. Thatcher sold them off debt-free, and endowed them with a further £1.5bn of public money, known as a “green dowry”, to help with improving their networks.

A graphic showing how much debt is owed by water companies

Since privatisation, shareholders have been paid £72bn in dividends, while bills have risen 40% in real terms.

Green MP Caroline Lucas told parliament last night that “privatisation of water was a serious mistake and it needs to be permanently rectified.”

Caroline Lucas, “Water companies had no debt when privatised. They have since borrowed £52 billion and paid £72 billion in dividends. Meanwhile we have a sewage scandal. Privatisation of water was a serious mistake and it needs to be permanently rectified.” pic.twitter.com/XrQSnjYV4L

— Farrukh (@implausibleblog) June 28, 2023

Environment minister Rebecca Pow, though, insisted that “The sector as a whole is financially resilient”, adding:

“Government of course is confident that Ofwat as the economic regulator of the water industry is working closely with any company that would be facing financial stress.”

A former Thames executive told the Guardian the water company faced “intractable” problems that were rooted in “over 100 years of underinvestment”.

There are estimates that the water industry needs to spend £70bn in total over the coming decades to fix the sewage discharge problem, and secure water supplies.

Thames Water’s difficulties have highlighted the key question – is it really possible to keep bills down, make profits and invest to make water clean? Or would nationalisation. removing the pressure to pay shareholders, help?

The consortium that took over ownership of Thames Water in 2017 has not taken a dividend since, but the company has paid internal dividends – including £37m in the year to March 31 2022.

The agenda

  • 8.30am BST: Sweden’s Riksbank interest rate decision

  • 9.30am BST: UK mortgage approvals figures for May

  • 10am BST: Eurozone confidence figures for June

  • 1pm BST: German inflation report for June

  • 1.30pm BST: US Q1 GDP report (final reading)

  • 1.30pm BST: US weekly jobless figures

Key events

An engineer walking inside a section of the Thames Tideway Tunnel.
An engineer walking inside a section of the Thames Tideway Tunnel. Photograph: Kirsty O’Connor/PA

One of the biggest shareholders in Thames Tideway, which is building a 25km Super Sewer under London, has reassured its investors that the project is independent of Thames Water.

International Public Partnerships Limited, which owns a 18% stake in Tideway, has issued a statement to the City, saying that “in order to provide clarity” to its investors, “Tideway is a completely separate company to Thames Water”.

It added:

“Whilst Thames Water does possess a licence requirement to collect Tideway’s revenues from its customers and pass those amounts to Tideway, statutory and regulatory protections are provided in the event that Thames Water encounters difficulties.”

It said that if Thames Water falls into a special administration regime (SAR) [temporary nationalisation], the process is designed to “mitigate the risk of disruption” to Tideway collecting its revenues, as well as to protect water customers.

Tideway will also be allowed to recover any shortfall later.

Tideway can also directly charge some customers to use the tunnel, IPPL adds, although this option is “unlikely to be utilised”.

Thames Water offered £17.5m to debt collectors

Jillian Ambrose

Debt-ridden Thames Water offered to pay debt collectors up to £17.5m to recover unpaid water bills weeks before crisis talks to rescue the failing water company, my colleague Jillian Ambrose reports.

Thames, which has debts of over £14bn, opened a tender for debt collection agencies earlier this month which promised a commission to agents able to recover water debt under a three-year contract.

The company, which serves 15 million customers in London and surrounding areas, reported unpaid bills totaling £36m at the end of September 2022 which is likely to be higher as rising costs continue to press on hard-hit households.

The water company added.

“With the cost of living rising, we recognise the importance of collecting debt in a socially responsible manner.”

Squeezed households ran down bank savings at record pace in May

UK households ran down their bank savings at a record pace last month, new Bank of England data shows.

During May, households withdrew £4.6bn from banks and building societies, which is the highest level of household withdrawals on record.

This was only partly balanced by £800m moved into National Savings and Investment accounts, by savers looking for higher rates than are available from deposit accounts.

It is a sign that households are now using savings to sustain living standards, says Daniel Mahoney, UK economist at Handelsbanken.

Mahoney explains:

This provides strong evidence that households are dipping into excess savings built up during the pandemic (estimated to be circa £200bn) to sustain living standards during the current cost of living squeeze caused by the high inflation environment.

A net ~£4bn withdrawal of household savings took place in May (which includes a small rise in NS&I deposits)

Too early to say if households are finally running down pandemic-era savings: one data point doesn’t make a trend. But worth keeping an eye on this in coming months pic.twitter.com/LoTjDEotrU

— Alpesh Paleja (@AlpeshPaleja) June 29, 2023

Charlotte Nixon, mortgage and financial planning expert at Quilter, says these “scary figures” show the impact of the cost of living on people’s finances.

Nixon explains:

This morning’s Money and Credit statistics for May now look very out of date as they paint a much rosier picture than the one we currently are suffering even though they are still nothing to celebrate about. These figures don’t account for the last few weeks of mortgage mayhem which will have further muddied these incredibly turbulent waters.

However, there were problematic signs appearing in May as people raided their savings during the month. Households, on net, withdrew £4.6bn from banks and building societies, which marked the highest level of household withdrawals on record (for this monthly series starting in October 1997). These scary figures show just what an impact the cost of living is having on people’s finances.

There have been calls for banks, which have been quick to up mortgage rates, to also raise the interest rates on their savings accounts too. However, bank executives have rebuffed this request saying that if they were to do this then mortgage rates would need to get pushed even higher for them to still achieve their margins.

However, this might be short-sighted as it is not helping incentivise people to save when times are this tough and as a result we have seen that the combined net flow of both household deposits with banks and building societies and National Savings and Investment (NS&I) accounts amounted to -£3.8 billion in May which was a significant fall from £5.3 billion in April. With people’s incomes stretched they want to be getting a decent return on savings if they can even afford to save at all.

Analysts at Capital Economuics fear that UK mortgage lending will remain weak over the coming months, despite the rise in mortgage approvals in May.

They explain:

The interest rate on newly drawn mortgages continued to rise by 10 basis points, from 4.46% to 4.56%.

But this precedes most of the recent surge in mortgage rates, which climbed to just above 6.0% last week for the first time since 2007. That suggests mortgage lending and housing activity will take a big step down in June and July.

UK mortgage approvals nudge higher

Back in the UK housing market, there has been a small uptick in the number of new home loans being agreed.

New Bank of England data shows there were 50,000 new mortgage approvals for house purchases in May, up from 49,000 in April.

Approvals for remortgaging also rose, from 32,500 to 33,600.

Overall, net repayments on mortgage debt dropped from a record £1.5bn in April, to £0.1bn in May (meaning borrowers paid back £100m more than they borrowed).

Mortgage lending in May saw net repayments down from record high in April of £1.5b to £0.1 bn of mortgage debt in May. But net approvals for house purchases inc’d from 49,000 in April to 50,500 in May & remortgaging approvals also marginally inc’d to 33,600 in May @bankofengland pic.twitter.com/dhKM4mCEAt

— Emma Fildes (@emmafildes) June 29, 2023

Hina Bhudia, partner at Knight Frank Finance, points out that mortgage approvals are still well below the long run average, as rising interest rates dampen demand.

Bhudia explains:

Rising mortgage rates are showing few signs of slowing and pretty much all of the major lenders have repriced higher over the past week.

“The pressure on borrowers is likely to continue until we see two or perhaps three encouraging inflation figures. If that happens, swap rates should ease and we’d expect lenders to pass that through to borrowers quite quickly.

“In the meantime, higher mortgage rates will continue to drag on activity. It’s going to be a subdued summer in the property market.”

Here is a company schematic (courtesy of JPMorgan, via the FT), which shows the complex structure of Thames Water:

The FT’s Bryce Elder explained it thus:

RWE sold Thames Water in October 2006 to Kemble Water Holdings Ltd, a consortium led by Macquarie. Almost immediately the buyers formed a Whole Business Securitisation (WBS) that allowed the group to be loaded with more debt, boosting shareholder returns while insulating the structurally senior bits of the company.

There are three main ring-fenced debt entities — Thames Water Utilities Holdings Ltd, opco Thames Water Utilities Ltd and Thames Water Utilities Finance PLC. The debt they issue is secured by all the assets in the WBS and there are cross-guarantees in place, as well as covenant protections to prevent cash leaking upwards.

But holding companies outside the WBS ringfence have also issued debt, most notably Thames Water Kemble Finance PLC. These holdcos don’t own any of Thames Water’s operating assets so are completely reliant on dividends from the WBS.

Labour MP Thangam Debbonaire, shadow leader of the House of Commons, says there has been a regulatory failure, and a system failure, in the water industry.

Debbonaire adds that the 1989 sale of the water industry “privatised the profits, and nationalised the risk”, leaving customers paying higher bills, and sewage on the beaches.

Debbonaire also suggests that 15 million people don’t know if they’ll have clean water by Saturday.

However, I’d suggest there’s no real risk of taps running dry – if Thames Water enters temporary nationalisation, it will keep operating (and Ofwat’s statement this morning does cite Thames Water’s ‘strong liquidity’).

Tim Short, a former investment banker at Credit Suisse First Boston, has written about the “Seven common misconceptions about the Thames Water crisis” for the Financial Times’s Alphaville site.

The first misconception, he says, is that “If Thames Water is crushed by its debt pile the water will run out”.

Short writes:

It’s important to be clear about which debt we are talking about. Thames Water relies heavily on securitisation; in the jargon this is a Whole Business Securitisation. The paper is nearly all ringfenced in a security package at what’s called OpCo, short for operating company.

The OpCo has manageable debt levels of around 0.75 of Regulated Capital Value at investment grade. The RCV can be thought of as the critical assets the company needs to provide safe clean water.

That means you could sell the assets and pay off all the debt in OpCo. Whatever happens, there’s no obvious risk to supply.

Away from the water crisis, UK mortgage rates are continuing to rise, adding to the pressure on borrowers.

Data firm Moneyfacts reports that:

  • The average 2-year fixed residential mortgage rate today is 6.37%, up from 6.30% on Wednesday

  • The average 5-year fixed residential mortgage rate today is 5.94%, up from 5.91% on Wednesday

There are currently 4,430 residential mortgage products available, a small increase on the 4,407 on offer yesterday.

Ofwat: Thames Water has significant issues to address

Just in: Britain’s water regulator Ofwat has said Thames Water needs to improve its financial resilience, but it insists the company still has strong liquidity.

In a statement issued a day after the government held emergency talks about the future of country’s biggest supplier, an Ofwat spokesperson said:

“Over the last day or so, there has been a lot of commentary about financial resilience in the water sector with considerable focus on Thames Water in particular.

“We have been clear that Thames Water has significant issues to address – their environmental record and leakage performance, for example, are poor. Alongside the turnaround of their operational performance, they need to improve their financial resilience too.

“But that is all in the context of a company that has strong liquidity – it recently received an additional £500 million from shareholders and has £4.4bn of cash and committed funding.

“Overall, the sector is continuing to attract international capital and is especially attractive to long term investors such as pension funds. Indeed, there has been an additional equity injection of around £2bn since 2020, with companies acting to strengthen their financial position.

Ofwat adds that it will continue to keep companies’ financial resilience under “close scrutiny” and ensure companies take action to ensure that they have the financial backing to deliver for customers and the environment.

Ministers must take some accountability for the quality of the UK’s regulators, says Labour MP Darren Jones.

Jones told BBC Breakfast that we wouldn’t be in the current situation if Thames Water hadn’t indebted itself so much, taken out so much wealth from the business for its shareholders, and paid its executives high salaries rather than investing in its infrastructure.

Feargal Sharkey has also told GMB that the water companies have been “effectively ramraided by their owners for cash”.

Those shareholders have made off with £72bn, Sharkey says – which could have been spent fixing leaking pipes and addressing the sewage problems.

.@Feargal_Sharkey has campaigned tirelessly about improving our water facilities and has accused firms of leaving the nation’s waterways in a desperate state.

He joins Kate and Ben to discuss the current water crisis. pic.twitter.com/ps39hkjdTc

— Good Morning Britain (@GMB) June 29, 2023


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