Thames Water bondholders submit rival £3bn financing offer
The battle for control of Thames Water’s future has deepened after a second group of bondholders tabled a fully underwritten offer to provide £3bn of new debt.
Sky News has learnt that the utility’s class B bondholders submitted a proposal to the company on Thursday morning which aims to trump a rival offer from its class A creditors.
The submission of the class B group’s legally binding agreement sets up a tussle between some of the world’s largest pension funds, hedge funds and insurers for a key role in determining the fate of Britain’s biggest water company.
Thames Water, which has about 16 million customers, is scrambling to avert the threat of insolvency and temporary nationalisation as it seeks a compromise from Ofwat, the industry regulator, over its spending plans for the next five years.
The company’s shareholders have already abandoned plans to inject billions of pounds into it, describing it as uninvestible.
The tabling of the latest proposal will put pressure on Thames to reconsider its public support for a more expensive deal with the class A group, which includes the likes of Silverpoint and Elliott Advisors, the American hedge funds.
One of the members of the class B group said its plan provided Thames Water with “a deliverable and binding offer to address the company’s immediate funding needs”.
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Amid a dispute with the class A debtholders about the relative cost to Thames Water of their proposals, the source said the class B financing would provide “twice the capital at a far lower cost and on more flexible terms”.
They added that it was open to all Class A and Class B holders.
It was unclear whether Thames Water would be able to engage on the class B proposal under the terms of the deal the company has already endorsed with the class A group.
The class B plan has been assembled and financed in less than a fortnight by DC Advisory, the investment bank, and law firms Quinn Emmanuel Urquhart & Sullivan and Sidley Austin.
The Class B debtholders have calculated that Thames Water could save approximately hundreds of millions of pounds in interest payments and fees over a 12-month period if the company switches its backing to their proposal.
Alastair Cochran, Thames Water’s chief financial officer, said last month that the Class B group’s proposals, which include funding lent at an interest rate of 8%, were insufficiently detailed to garner the board’s support.
A separate equity-raising process is being run by bankers at Rothschild, with Sky News revealing last weekend that KKR, the American private equity behemoth, is the latest party to express an interest in a deal.
Any substantial pay packages for Thames Water executives – particularly at one standing on the brink of collapse – arising from the deal would be highly contentious, with the government recently having established an independent review of the industry that will look at far-reaching reforms.
A significant incentive plan would also be controversial given that Thames Water will require forbearance from Ofwat, the industry regulator, in terms of substantial fines and other penalties it is likely to have to pay because of its dire record on sewage leaks and wastage.
A spokesman for the class B group, whose members include BlackRock, the world’s biggest asset manager, declined to comment.
Business
Higher employers’ national insurance contributions to cost Sainsbury’s £140m and cause inflation to rise – CEO Simon Roberts says
Measures announced in the budget will cost one of the UK’s biggest supermarket chains £140m, its chief executive said.
The rise in employer’s national insurance contributions, announced by Chancellor Rachel Reeves in her budget last week, will cost Sainsbury’s £140m from April, CEO Simon Roberts said.
No price was put on the rise of the national minimum wage but Mr Roberts said the new measures would cause inflation – the rate of overall price rises – to go up.
The supermarket chain, the UK’s second-largest by market share, does not have the “capacity to absorb” a “barrage of costs”, Mr Roberts said so customers will have to pay more.
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He pointed to analysis from independent forecaster the Office for Budget Responsibility (OBR) which said Ms Reeves’s announcements would cause inflation to be higher than originally predicted, saying it was “difficult to disagree with”.
Mr Roberts said: “This impact on national insurance was unexpected and is coming in fast, it will have a very significant impact, it will impact our costs base… and our suppliers’ cost base.”
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When asked to quantify the inflationary effect of minimum wage rises and upped national insurance contributions Mr Roberts said inflation was already on the up, there’s “a lot of pressure in the pipeline….there’s pressure in the system in inflation already”.
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What had been expected, Mr Roberts said, was a reduction in business rates: “Business rates will go up this year I certainly didn’t expect them to go up next year I expected them to go down”.
What does it mean for staff?
When asked what the impact could be on the Sainsbury’s workforce Mr Roberts said the company had “difficult decisions to take as a result” but it was “too early to be specific”.
Earlier this week JD Wetherspoon, which owns more than 1,000 pubs across the UK, said the budget will add £60m in costs next year, while M&S expects to take a £120m hit.
Changing habits
Also announced by Sainsbury’s on Thursday morning was the return of the “big weekly shop” as people are going back to the office.
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As a result of higher restaurant prices people are also eating at home more, Mr Roberts added.
Donald Trump’s victory was secured on an unequivocal promise to stretched American households that he would “end inflation”, but markets and economists are anticipating his second term will do the opposite.
A combination of corporate tax cuts, government borrowing, lower migration and swingeing tariffs on overseas imports are all expected to heat up the American economy and stoke price rises.
Bond yields on 10-year US Treasuries, effectively the price of borrowing for the American government, were up by 3.6% overnight, rising more than 15 basis points to above 4.4% as European markets opened.
That signals investors believe that borrowing will rise, and the Federal Reserve will be forced to slow rate cuts in order to tackle inflation.
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A clearer picture will emerge on Thursday when Federal Reserve chairman Jay Powell, who Mr Trump said will not be reappointed, announces the next move on rates.
Markets still expected a 0.25 percentage point cut (a similar move to that anticipated from the Bank of England earlier in the day) but Mr Powell’s comments will be scrutinised for signals of what Trump 2.0 means for the prospect of further cuts.
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Trump wins: Demographics and key issues
But higher prices for consumers are not necessarily bad news for corporate America, with the dollar surging against sterling and the euro as swing states fell to Mr Trump, and Wall Street futures trading indicating a rally when they reopen with him confirmed as president-elect.
Shares in US banks were boosted with J.P. Morgan, Goldman Sachs and Morgan Stanley all up more than 6% in pre-market trading, along with Tesla, boosted by more than 13% as markets anticipate a dividend for Elon Musk’s campaign-trail support.
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Defence stocks were higher too and not just in the US – BAE Systems and Rolls Royce were both up – reflecting likely pressure on America’s NATO allies to make good on their commitments to increase spending.
Bitcoin was also positive in anticipation of a more benign regulatory environment from a president who used the campaign platform to launch his own cryptocurrency.
By contrast renewable holdings, the target of much of Joe Biden’s economic stimulus, were in negative territory, with wind and solar priorities likely to be replaced by a pledge to “drill baby, drill”.
Of most concern to America’s trading partners and allies will be Mr Trump’s promise to erect barriers to free trade.
The man who said tariffs “is the most beautiful word in the world” has pledged a 60% levy on Chinese imports and 10% on those from elsewhere, a deeply protectionist move that could trigger a trade war with China and the EU.
These can only increase prices in the US, with importers paying the levies at the point of entry, and other trading blocs likely to respond in kind.
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The EU has already imposed its own 35% tariff on Chinese EVs to the dismay of the continent’s carmakers the measure is intended to protect.
While these tensions play out, post-Brexit Britain, a relatively small player outside the major trading blocs, is likely to be a spectator.
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