Let Thames Water fail

The case for special administration

Executive Summary

Thames Water is on the ropes. The easiest option is to cobble together a deal with investors that softens pollution targets and fines, allowing a heavily indebted company to limp on. That would be a political mistake.

Thames Water played at capitalism, and it lost. The government needs to make sure reckless companies lose their shirts. Otherwise voters conclude the system is rigged and Labour is a party protecting the status quo.

There is a big political prize in allowing Thames Water to go into administration. It could reduce bills for 16m people and show Labour picking a fight with extractors.

The risks from the company going into administration are overblown. Rather than scaring away investors, a fundamental reset of Thames’ finances will reassure them. It will cauterise the much bigger risk in investors’ eyes: the spectre of nationalisation. A fudged deal that softens pollution targets, sees large returns for some hedge funds while bills remain high, and fails to free up Thames’ balance sheet for more investment will fuel calls for nationalising the whole industry. That is the real contagion risk.

Allowing Thames to go into administration may require some temporary liquidity support from HMT. But it will be at the top of the creditor hierarchy and can charge a 10% rate of interest. So in the medium term, the taxpayer is almost guaranteed to be made whole, or better. God made fiscal headroom for moments like this.

This paper is based on discussions with investors, restructuring experts and other industry figures. It concludes with a practical guide to do a quick Special Administration Regime for Thames. It is based on information in the public domain.