Introduction: UK water sector faces biggest crisis since Thatcher
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
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.
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.
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
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8.30am BST: Sweden’s Riksbank interest rate decision
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9.30am BST: UK mortgage approvals figures for May
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10am BST: Eurozone confidence figures for June
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1pm BST: German inflation report for June
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1.30pm BST: US Q1 GDP report (final reading)
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1.30pm BST: US weekly jobless figures
Key events
Full story: UK households withdrawing savings at fastest rate on record
Richard Partington
UK households are pulling money out of their savings accounts at the fastest rate ever recorded, drawing on rainy-day funds to weather the cost of living storm, my colleague Richard Partington writes.
Figures from the Bank of England show households withdrew a net £4.6bn from banks and building societies in May, the highest level of withdrawals since it started collecting the monthly data in October 1997.
The figure suggests those able to do so are running down their funds to sustain living standards or to pay off mortgages or loans before needing to refinance at higher interest rates.
Richard Lane, the director of external affairs at the debt charity StepChange, said:
“This is the latest in a long line of warnings that more and more people are struggling to cope with the cost of living.”
Looking back at the Thames Water crisis… Downing Street said it is for Ofwat “in the first instance” to monitor the financial resilience of water companies.
Rishi Sunak’s official spokesman told reporters:
“Of course the government is carefully monitoring this but it is for the regulator in the first instance.
“Ofwat are focused on doing their job to keep companies’ financial resilience under close scrutiny.”
Asked whether Rishi Sunak was confident the watchdog is on top of the issue, the official said:
“Yes. You’ll know the Chancellor met with regulators including Ofwat recently to talk about what more can be done, but as I say they have emphasised both the resilience of the sector and stressed that while there are clearly issues with Thames Water they have secure and committed funding.”
In another boost to the US economy, the number of Americans filing new unemployment claims has dropped.
There were 239,000 initial claims last week, a drop of 26,000 from the previous week, suggesting that the US jobs market remains robust.
Just in: The US economy grew faster than previously estimated at the start of this year.
New official data show US GDP grew at an annual rate of 2% in January-March, the equivalent of a quarterly growth rate of 0.5%.
Growth had previously estimated at an annualised rate of 1.3%.
The upgrade is because exports and consumer spending rose faster than previously estimated.
Water privatisation might be a shitty idea because it pumped fat dividends to shareholders for no risk, or because investors (including pension funds) will lose huge sums when the companies go tits-up, but screwing up on both counts is quite the achievement.
— Paul McNamara (@M_PaulMcNamara) June 29, 2023
Over in the eurozone, the latest inflation data paints a mixed picture.
Annual inflation in Germany has risen to 6.4% in June, up from 6.1% in May, further from the European Central Bank’s 2% target.
On an EU-harmonised basis, German inflation rose to 6.8% from 6.7%.
Core inflation (stripping out food and energy), a measure closely watched by central bankers, rose to 5.8% from 5.4%.
The increase is partly due to ‘base effects’, as train travel and petrol in Germany was subsidised a year ago, making it cheaper than today.
#Inflation re-accelerated in Germany again due to base effects. The comparison effect from last year, when the Berlin govt offered citizens ultra-cheap rail tickets & subsidized gasoline, pushed up consumer-price growth to 6.4% in June from 6.1% in May and vs 6.3% expected. Food… pic.twitter.com/BsrgY1FW9G
— Holger Zschaepitz (@Schuldensuehner) June 29, 2023
But in Spain, inflation has dropped below the 2% level.
Spain’s consumer prices rose 1.9% year-on-year in June, their slowest increase since March 2021, preliminary data from the National Statistics Institute (INE) showed on Thursday.
Spain is the first among the euro zone’s large economies to have inflation fall below 2%, the European Central Bank’s target, the Economy Ministry said in a statement.
Bloomberg Intelligence: Thames Water special administration could lead to 25% debt haircut
Thames Water might need to write off a quarter of its debt if the government takes control of the company, according to a Bloomberg Intelligence report.
Paul Vickars, senior credit analyst at Bloomberg Intelligence, says that if Thames Water enters a special administration regime, finding a new owner may require a haircut of up to 25% on the nominal value of its ring-fenced debt, of aroudn £14bn.
Vickars writes:
A special administration regime would facilitate a transfer to new owners but leave ring-fenced bondholders unable to enforce any security and with no guarantee of being made whole in a new financial structure.
Taking a 25% haircut would reduce Thames Water’s regulatory gearing to “the notional 60% set by Ofwat to enable a company to finance its operations at high grade level”, Vickars says, which a new owner could reasonably stipulate.
As explained earlier, Thames Water’s complicated structure means that the operating company (the bit actually supplying clean water and taking waste away) is ringfenced inside a Whole Business Securitisation (WBS) shell along with the holding company and financing company.
But there are holding companies outside the ringfence, which have also issued debt, and rely on dividends from the WBS to service it.
Vickars writes that they are most at risk from a government takeover:
“The risk of Thames Water being placed into a special administration regime is most acute for bonds outside of the securitization ring-fenced group, namely the £400m 4.625% 2026 bond from Thames Water Kemble Finance Plc that has fallen by 35 points to a price of about 50*.
The Class B second-lien instruments within the ring-fenced group look to be next in line, though by some distance, with the £250 million 2.875% 2027 bond from Thames Water Utilities Finance Plc down by 4 points to a price of 79.”
Thames Water might need to write down £3.6 billion of debt if the government takes over control, according to a Bloomberg Intelligence report https://t.co/FPm3LSeNlC
— Bloomberg (@business) June 29, 2023
* – ie: half its face value.
In the City, shares in water companies have dropped this morning as investors fret about their long-term financial resilience, given the scale of investment needed to hit environmental improvement targets.
Severn Trent are among the third-biggest faller on the FTSE 100 index, down 3%. United Utilities, which supplies water in the North West of England, have dropped by 1.6%.
Pennon Group, which services the South West of England, and the Bristol and Bournemouth regions, are down 3% on the FTSE 250 index of medium-sized firms.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, says investors are reassessing the longer-term implications for other firms in the sector.
Streeter writes:
Shares in Severn Trent, Pennon and United Utilities have fallen back more steeply amid the focus on the costs looming for firms which are set to become under increasing pressure to meet environmental targets set by Ofwat. Although their immediate financial situation is considered to be more stable compared to other companies, who have been red flagged by regulators for their high levels of debt and dividend payments, the scale of the mountain to climb in terms of the investment needed is sparking fresh concerns.
Arguably, publicly listed companies have fewer shadows to hide in when it comes to transparency about dividend payments than firms with more complicated investment structures. However, as the next regulatory timeframe looms for the period 2025 to 2030, there is set to be much bigger demands from regulators on infrastructure improvements to reduce sewage spills, increase capacity, and meet net zero targets. Capital expenditure will have to increase sharply as a result – United Utilities, Severn Trent and Pennon have already had to push up spending, but budgets will need to expand, and debt levels will rise as a result.
Drought likely in Cumbria and Lake District, government committee told
Helena Horton
Cumbria and the Lake District are likely to be plunged into drought, leaked minutes from the government’s National Drought Group reveal, with reservoir levels in the regions having dropped significantly.
Other popular summer holiday destinations including Devon and Cornwall are also likely to be hit by water supply problems, the group heard, and holidaymakers may be be told to curb their use.
Sources present at the meeting – at which attenders included officials from No 10, farming groups, water companies and the water minister, Rebecca Pow – told the Guardian experts warned the high levels of visitors to drought-stricken areas in summer was potentially unsustainable.
Though the country has enjoyed some rainfall over recent weeks, it has not been enough to offset the prolonged dry weather and increased water use. The leaked minutes, seen by the Guardian, reveal:
“Some reservoirs have seen large drops in recent weeks, and there are concerns in the Lake District, where at Haweswater and Thirlmere there was a decrease of 13% in reservoir stocks between the end of April and end of May 2023. The Teesdale reservoir group in north-east England also recorded a 13% drop over this time. Water companies continue to closely monitor the position and take action to reduce demand and maximise storage.”
Here’s the full story:
Bill Blain: UK’s long-saga of economic decline is turning critical
The Thames Water crisis risks creating a potential investment crisis in the UK, warns Bill Blain, strategist at Shard Capital.
Blain points out that the public utility privatisations decades ago have left “a legacy of underinvestment and broken services”.
And he fears that “the imminent collapse” of the UK’s largest water company will become the fundamental crisis point when “the country’s long-saga of economic decline turned critical”.
Blain writes:
Economic success is all about confidence and common sense. This is not about the collapse of a single company – it’s about how 40 years of miscalculations, mistakes, and the primacy of political will over common sense, have finally come due.
Today’s crisis will have massive market, political and economic consequences as the travails of Thames Water ultimately reveal just how disjointed, hollowed-out, ineffective, but most importantly, how bust and broken the last 40 years has left the UK economy
Global investors looking at the UK today see “a nation of decaying infrastructure, a massive bill to rebuild it, a planning process that actively stops anything – and a nation showing little realisation of the crisis”, Blain adds.
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”.
