A torrent of special pleas from Thames Water

Mega retention bonuses for executives, the hazard of a hosepipe prohibition this summer, and a confession that the institution came wrong 5 weeks of moving retired of money. Yes, it was much of the accustomed delights from Thames Water successful beforehand of the situation prime committee connected Wednesday.

But the astir overused operation successful the league was “turnaround regime”. This is the murky – oregon pragmatic, depending connected your constituent of presumption – conception that Thames tin triumph further, big, compromises from regulators to get its fiscal restructuring implicit the line. In short: special treatment.

By mode of reminder, KKR, the US backstage equity house, is primed to instrumentality power of Thames by injecting up to £4bn of equity; and the company’s elder creditors are facing haircuts connected their debt. KKR and the bondholders anticipation to hold outline presumption by the extremity of this month. Then they’ll trot circular to Ofwat and the Environment Agency to statesman the existent dialog – the plea for regulatory “flexibility”, arsenic Weston enactment it.

They volition beryllium “discussing with the regulator the conception of a turnaround authorities that mightiness supply immoderate alleviation from the mean regulatory situation portion a institution recovers its operations,” said Weston. “I deliberation that is an implicit imperative for Thames different we volition not beryllium invested in.”

What is this “relief”? Well, fixed the fig of times the fig was mentioned, 1 absorption seems to beryllium the £900m of regulatory penalties that Thames assumes it volition incur successful the adjacent 5 years for missing operational targets. There is besides interest implicit imaginable fines from the Environment Agency (EA).

How would the process work? Ofwat cannot simply hold not to enforce £900m of penalties. But, though this wasn’t spelled retired by Thames’s directors, it’s not hard to ideate a paper of imaginable fudges. If the operational targets are excessively high, conscionable invent little ones for a institution successful this yet-to-be-designed “turnaround regime”? Or however astir undertakings of bully behaviour successful lieu of fiscal penalties? Or much state to displacement promised spending betwixt regulatory cycles?

Strictly speaking, determination is already immoderate ceremonial scope for Ofwat to beryllium flexible wrong the established model – although, arsenic it says, determination is meant to beryllium a “high bar”. But what Thames, KKR and the bondholders look to beryllium imagining is thing much akin to a re-write of Ofwat’s “final determination” connected the concern plan. All past year’s arguments astir whether the regulator allows Thames to put capable are being re-litigated extracurricular the mean method of appealing to the Competition & Markets Authority (Thames has deferred its appeal).

There is nary warrant that Ofwat volition play shot successful June, of course. But 1 tin stake that it volition travel nether unspoken unit to bash truthful due to the fact that the government is plainly hopeless to debar Thames falling into the peculiar medication authorities (SAR), AKA impermanent nationalisation. Ministers, 1 suspects, would similar Ofwat and the EA (which is portion of the situation section anyway) to beryllium arsenic flexible arsenic indispensable to get the KKR woody done.

Advocates of specified an result reason it is simply expedient. SAR, they say, threatens a messiness of litigation from bondholders and an upfront measure for the authorities to support Thames afloat. Better to crook the regulatory authorities retired of shape, and accidental that Sir John Cunliffe, whose reappraisal of the h2o assemblage is coming down the track, whitethorn soon suggest thing similar a “turnaround regime” anyway.

Yet it’s not hard to spot who wins if Thames gets peculiar regulatory treatment. It volition beryllium the people A bondholders who tin expect to flight with haircuts, oregon write-downs connected their debt, successful the bid of 25%. If nary regulatory alleviation is offered, oregon if SAR happens, oregon if Thames is obliged to spell to the CMA, the haircuts would precise apt beryllium much severe.

As Thames’s chair, Sir Adrian Montague, pointed out, it is those bondholders – not the institution oregon its customers – who volition wage the enforcement “retention incentives” of up to 50% of wage arsenic portion of a £3bn exigency loan. What’s the logic successful this antithetic arrangement? It is surely lone this: if the executives tin assistance to charm Ofwat and the EA into submission, they’ll prevention the bondholders a fortune.