Thames Water woes could have bigger ripples

LONDON, June 28 (Reuters Breakingviews) – The UK government is working on plans to nationalise Thames Water, Sky News reports. The indebted utility, which lost its chief executive on Tuesday, may be placed into a special administration regime, with ministers worrying about the company’s ability to shoulder 14 billion pounds of debt.

UK water companies, privatised by Margaret Thatcher in the 1980s, were supposed to be sleepy investments churning out inflation-proof dividends. But they have come under pressure in recent years due to tougher price controls, high investment and energy costs, and poor performance on spills. The main issue, however, has been a select number of companies’ zeal for financial innovation, with the likes of Thames or Yorkshire Water gearing themselves up to deliver bigger returns to shareholders, lowering their cushion for external shocks. High use of inflation-linked debt has also hurt, as price surges have boosted borrowing costs.

Thames, owned by Macquarie (MQG.AX) until 2017, had debt equivalent to 80% of its 17.9 billion pounds regulator-defined asset value last September. Its current shareholders, which include Ontario Municipal Employees Retirement System and China Investment Corporation, last year pledged to invest 1.5 billion pounds to prop it up. If Thames does need a rescue, lenders to other weak utilities are likely to panic. And the government, after a mixed performance by the private sector since privatisation, may decide it’s worth trying a new ownership model. (By Neil Unmack)

Follow @Breakingviews on Twitter

Capital Calls – More concise insights on global finance:

Eli Lilly gorges on obesity options read more

Yacht maker’s westward detour comes at a price read more

Blackstone deal is a bright spot in gloomy sector read more

Aston Martin pulls out of slow lane in EV race read more

Canada is calling Meta’s bluff read more

Editing by George Hay and Streisand Neto

Our Standards: The Thomson Reuters Trust Principles.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.