Will OMERS and BCI Drown Along With Thames Water?

Jonathan Prynn of the Evening Standard reports the government on alert amid fears Thames Water ‘could collapse’:

The future of Thames Water was thrown into doubt on Wednesday (last week) after its boss dramatically quit amid reports the Government is drawing up contingency plans for its collapse.

Ministers and regulators are said to be concerned that Britain’s biggest water supplier, which has 15 million customers in the capital and along the Thames Valley, may be unable to service its huge debt pile.

The Reading-based company has at least £14 billion of borrowings at a time of sharply rising interest rates and huge investment demands, putting a huge strain on its balance sheet.

According to Sky News reports, talks in Whitehall involving ministers and officials at Department for Environment, Food and Rural Affairs (DEFRA), Ofwat and the Treasury, revolve around a possible special administration regime (SAR) for the privatised utility.

A similar process was used when the energy supplier Bulb collapsed in 2021 and would amount to a temporary renationalisation that would be the biggest since Royal Bank of Scotland and Lloyds Banking Group were rescued at the height of the global financial crisis in 2008.

It would ensure that water and sewerage services are not disrupted whatever happens to Thames Water.

The crisis meant that a Cabinet minister was on Wednesday put in the extraordinary position of having to reassure Londoners that their water supply was not under threat.

Work and Pensions Secretary Mel Stride told LBC Radio: “Government has contingency arrangements in place to cover any scenario which may play out.

“What I’m supremely confident of is whatever the situation is at Thames Water, the water will continue to flow.”

The reports of the contingency plans came hours after the company’s boss Sarah Bentley resigned unexpectedly with immediate effect after three years in the job. Her departure came after strong criticism of the company’s record on leaks and sewage outflows into rivers. Last month the £1.6 million a year executive agreed to give up her bonus this year. It is not clear whether she will receive a pay off.

Her departure came as thousands of Londoners were once again hit by a major water leak. The company said customers in the W6, W12 and W14 postcodes of west London were reporting low pressure or no water.

Government concern about the pressure on Thames Water’s finances has been growing for several months. The company is still in talks with its shareholders about raising as much as £1 billion in fresh funds following a £500 million injection agreed last year. Its largest shareholder is Canadian pension fund Ontario Municipal Employees Retirement System (Omers), which holds a nearly 32 per cent stake.

Others include China Investment Corporation, the country’s sovereign wealth fund; the Universities Superannuation Scheme, the UK’s biggest private pension fund; and Infinity Investments, a subsidiary of the Abu Dhabi Investment Authority.

In response to the reports, Thames Water said: “As envisaged in June 2022, Thames Water received the expected £500 million of new funding from its shareholders in March 2023 and is continuing to work constructively with its shareholders in relation to the further equity funding expected to be required to support Thames Water's turnaround and investment plans. Ofwat is being kept fully informed on progress of the company's turnaround and engagement with shareholders.

“Thames Water remains focused on delivering for its customers, the environment and stakeholders.”

Meanwhile, one of Britain’s leading infrastructure experts warned water bills could be hiked by around 40 per cent for some households,

Sir John Armitt, chairman of the National Infrastructure Commission, told BBC Radio 4’s Today programme: “By 2050, the Environment Agency and the water companies believe that about £50 billion needs to be invested to get sewage overflows down to an acceptable level.

“We have previously estimated that £20 billion needs to go into ensuring that we have sufficient water by 2050.

“So you are talking about very large sums of money to restore and enable our water infrastructure and our sewage infrastructure to be fit for purpose.”

Pressed on warnings that water bills could go up by 40 per cent, he added: “They are probably not unrealistic.”

The Times reported on Wednesday that South East Water is planning to increase its bills by as much as 39 per cent by 2030, Thames Water 20 per cent, and Wessex Water by 30 per cent.

Responding to the suggestion that Thames Water could collapse, Darren Jones, chairman of the Commons business committee, tweeted: “Corporate greed playbook: Load company with debt; Dividends, exec pay and debt finance up; Investment, worker pay and customer service quality down; Company goes bust; Shareholders and execs walk away with millions; Taxpayer picks up the pieces; Rinse and repeat.”

Chancellor Jeremy Hunt was on Wednesday morning meeting the regulators Ofwat, Ofgem and Ofcom as the Government seeks to address the cost-of-living crisis.

Alex Lawson, Anna Isaac and Sandra Laville of the Guardian also report into what went wrong at Thames Water and what could a bailout look like:

Ministers and the water regulator, Ofwat, are scrambling to draw up contingency plans to rescue Thames Water amid fears that Britain’s biggest water company may collapse under a bulging debt pile.

Officials are considering how to take the company, which was privatised in 1989, into temporary public ownership if vital funds cannot be found. The news followed the surprise resignation on Tuesday of its chief executive, Sarah Bentley, and the industry as a whole is under fire over sewage dumping, water leaks, hosepipe bans and billions of pounds paid out to investors.

How did we get here?

Bentley was appointed in 2020 to revitalise the water supplier, which has 15 million customers in London and the south-east. She laid out a plan to invest billions in the leaky network, with shareholders “underwriting a turnaround plan”. Last year, the company received a £500m cash injection from shareholders who had agreed a further £1bn in principle. Bankers at Rothschild were hired in March to examine financing options for the firm, which has £14bn of debt and 7,000 employees.

On Wednesday, after reports about the possibility of a bailout emerged, Thames said it was “continuing to work constructively with its shareholders” and had £4.4bn of cash on its balance sheet. Its largest investor is Ontario Municipal Employees Retirement System (Omers), a Canadian pension fund, alongside the Universities Superannuation Scheme (USS), China Investment Corporation and Abu Dhabi’s Infinity Investments.

What happened to Bentley?

Bentley abruptly stepped down as chief executive without a clear reason for her resignation and only a brief statement saying: “The foundations of the turnaround that we have laid position the company for future success to improve service for customers and environmental performance.”

Industry sources said she had privately expressed frustration over the former owner Macquarie’s underinvestment in the business, while other sources noted that Thames’s annual report was due on Tuesday next week and would lay out the company’s performance in stark terms. Bentley has also faced uncomfortable headlines of late over the water company’s leakage record and her decision to give up her bonus but receive larger, separate payments, which was labelled a “PR stunt”.

What was Macquarie’s role?

While the consortium that has owned Thames since 2017 has yet to take a dividend out of it, its predecessor – the Australian bank Macquarie – has been widely criticised for its stewardship of the water company between 2006 and 2017. It has faced accusations of “asset stripping” and “ripping off the taxpayer” by not paying corporation tax. It is estimated that Macquarie left Thames with an extra £2.2bn in loans and £2.7bn was taken out in dividends, while the water company’s debts rose sharply from £3.4bn to £10.8bn under its ownership.

Eyebrows were raised when Macquarie was allowed by regulators to wade back into the English water industry in 2021, with the acquisition of struggling Southern Water. The then Ofwat chair, Jonson Cox, warned the regulator would be “monitoring the performance of the company closely” when it took control.

What could a Thames bailout look like?

The government has had to intervene in several high-profile corporate failures over the last two decades, including the bust bank RBS, British Steel and most recently the collapsed energy supplier Bulb, which was eventually acquired by Octopus Energy after nearly a year in government hands.

Whitehall sources say the greatest parallels are with Railtrack, which was placed into a government handled administration in 2001. Sources suggest management at both Railtrack and Thames had underestimated the amount of investment required, meaning assets were valued higher than was merited.

Ofwat says that the special administration regime, enshrined in law under the Water Industry Act 1991, is designed “not to keep a company in business but rather to ensure that the provision of services to customers is maintained” – meaning investors “bear an appropriate level of risk in relation to the decisions that they make” and reducing the “risk to taxpayers that they will have to bear costs relating to a failed company”. If any of the cost does reach billpayers, that could come on top of the 40% increase in bills mooted by water companies in England.

Are there financial concerns over other water companies?

Yes, the sharp increases in inflation and interest rates have pushed up costs in a debt-laden sector. South East Water said in its last annual report that those increases may “adversely affect the company’s financial performance”, with the cost of its debt increasing. Last autumn, Yorkshire Water agreed to repay £941m of inter-company loans to improve its financial resilience.

Ofwat’s financial resilience monitoring report noted in December that the credit ratings of six water companies – Northumbrian, Southern, Thames, Affinity, South East and South Staffs – were at the lower end of the investment grade rating.

The regulator also said there was “scope for improvement” in the transparency and detail of Thames, Bristol, Yorkshire and SES Water’s “long-term viability statements”, which they are required to submit annually.

Michael Race of BBC also reports big Thames Water investor backs turnaround plans:

One of the UK's largest private pension funds has backed Thames Water to turnaround its finances and performance after fears the firm could collapse.

Universities Superannuation Scheme (USS), a major investor in the water firm, is the first to publicly support it as it looks to secure extra funding.

Thames Water is billions of pounds in debt and there have been calls for it to be nationalised.

USS said the firm "could benefit" from having it among its shareholders.

"We know that leakage and sewage remain major issues, but we also know there are no quick fixes where a complex network of pipes stretching for miles - some of which have been in the ground for 150 years - need to be replaced," said USS group chief executive Bill Galvin.

Mr Galvin added improvements would "take time" and added "significant investment is needed".

Thames Water, which serves a quarter of the UK population, has faced heavy criticism over its performance in recent years due to sewage discharges and leaks. The company leaks more water than any other water company in UK, losing the equivalent of up to 250 Olympic size swimming pools every day from its pipes.

Its chief executive, Sarah Bentley, resigned last week, weeks after she was asked to forgo her bonus over the company's handling of sewage spills.

Thames Water is a private company, owned by a group of investors, with the largest being the Canadian pension fund, OMERS, with 31.8%.

OMERS has declined to comment on the water firm's current situation, but USS, a pension fund for UK academics and the second biggest investor with a 19.7% stake, is the first to announce its support.

"We have given our backing to Thames Water's turnaround plan and Net Zero roadmap and engage with them regularly to support their long-term strategy," Mr Galvin said in note to staff, which was first reported by the Financial Times.

"We remain of the view that, with an appropriate regulatory environment, the long-term objective of repairing important UK infrastructure and paying pensions to our members are in strong alignment."

Thames Water said last week that it was trying to raise the cash it needs to improve.

It said it was keeping water regulator Ofwat informed on progress, and that it still had "strong" cash and borrowing reserves to draw on.

Regardless of what happens, water supplies will continue as normal to customers.

Last year Thames Water's owners - including USS - pumped £500m into the business and pledged a further £1bn to help it to improve.

But the company is understood to be struggling to raise the remaining cash which it needs to service its substantial debt pile, which is around £14bn. Interest payments on more than half of its debt are linked to the rate of inflation, which has soared over the last year.

Other water firms are also facing similar pressures due to higher interest payments on their debts and rising costs including higher energy and chemical prices.

Rob Mackin of BIV reports a UK utility partially owned by Canadian pension funds is drowning in debt:

Two Canadian pension funds — one of which is Victoria-based — are shareholders in London’s troubled water and sewage utility company.

The Financial Times reported Wednesday that Thames Water is in talks with the U.K. government about potentially nationalizing the company, which is facing a crisis over its £14 billion debt, worth $23.4 billion in Canadian funds. CEO Sarah Bentley suddenly quit Tuesday and a new chair, Adrian Montague, was officially announced Friday.

Ontario Municipal Employees Retirement System (OMERS) is the biggest external shareholder with a 31.777-per-cent stake. B.C. Investment Management Corp. (BCIMC) holds 8.706 per cent. Other investors include sovereign wealth funds in Abu Dhabi and China.

In 2006, the BCIMC Crown corporation was part of the Kemble Water Ltd. consortium, led by Australian investment bank Macquarie, that acquired Thames Water from Germany’s RWE AG for £8 billion.

Thames Water issued a statement to the London Stock Exchange (LSE) on Wednesday, downplaying what it called “press speculation.”

OMERS has not replied. BCIMC refused comment, instead referring a reporter to the LSE statement, which said the company had the equivalent of $7.4 billion in cash, received $841 million of new funding from shareholders in March “and is continuing to work constructively with its shareholders.”

Financial Times reported that shareholders pledged more than $2.5 billion a year ago.

BCIMC’s most-recently released investment inventory, dated March 31, 2022, showed Thames Water among 27 companies under its infrastructure and renewable resources portfolio, which represents 9.5 per cent of BCIMC assets under management. The portfolio represents 9.5 per cent of BCIMC’s $233 billion assets under management.

The regulator, Water Services Regulation Authority, which goes by the brand name Ofwat, was “deeply concerned” about Thames Water and four other regional monopolies, which it deemed “the worst performing companies operationally.”

In November, Ofwat ordered Thames Water to return more than $84 million and Southern Water $50.5 million to customers after missing performance targets.

The poorest performers, Thames Water and Southern Water, are consistently falling beneath our expectations and those of their customers,” Ofwat said. “They need to take immediate action to improve their performance and rebuild trust with the people they serve. We will continue to hold companies to account for their performance and we will make sure that they raise their game.”

One of the biggest voices urging action to reform Thames Water is fly-fishing enthusiast and environmental campaigner Feargal Sharkey, who gained fame as the lead singer of Northern Ireland punk band the Undertones in the late 70s and early 80s.

“We, the customers, have for 30 years already provided all of the funding necessary for water companies to comply with the law, something water companies confirm to Ofwat each and every year,” Sharkey tweeted. “Where’s our money gone? What has happened to it? When can we the customer have a refund?”

And Pamela Kokoszka of IPE reports on the Thames Water crisis and whether investors dive deep into water sector’s future prospects:

With the potential intervention from the UK government into the Thames Water crisis on the horizon, advisers have warned investors will now be re-assessing their investments in water firms.

On Wednesday, Thames Water announced its chief executive officer Sarah Bentley was stepping down with immediate effect as the water utility company struggles with a £14bn debt pile.

As a result, it was reported that ministers began discussing a temporary nationalisation of Thames Water as investors and the government braced for the potential collapse of the firm.

While initially “shrugging off” the crisis talks surrounding Thames Water yesterday, Susannah Streeter, head of money and market at Hargreaves Lansdown, said that investors are now reassessing the longer-term implications for other firms in the sector.

She said: ”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.”

Streeter pointed out that energy firm Bulb went through a similar process when it collapsed in 2021, to which the government is now proposing for Thames Water.

She said: “But Thames Water is a giant in the water industry, supplying 15 million households, and has a customer base 10 times the size of Bulb’s.”

She said that it is likely to prove more difficult to find a buyer for Thames Water, particularly given its £14bn debt load.

She added: “The big question is whether the company’s investors, including overseas pension and sovereign wealth funds, will be willing to stump up a promised financial lifeline of £1bn.

“Pouring more money into the financial black hole Thames Water appears to have dug is clearly an unwelcome prospect, with little hope of future returns given the huge infrastructure work needed to mend leaks and sewage discharges.”

The potential precariousness of other water firms is now being questioned as well.

Streeter pointed out that The Water Services Regulation Authority (Ofwat) has been monitoring Southern Water and Yorkshire Water, as well as Thames Water, given its concerns over their financial resilience.

In its 2022 annual report, it also flagged worries about Northumbrian Water and Portsmouth Water for having fallen far short of expectations when it came to the level of dividends paid given their relative financial resilience.

“It’s no wonder waves of worry are now surrounding more firms who have been caught uptide, as the era of cheap money has been dammed and their debt payments have hurtled upwards,” the regulator stated.


According to the Thames Water website, its external shareholders include Ontario Municipal Employees Retirement System (OMERS), Universities Superannuation Scheme (USS), Infinity Investments SA, British Columbia Investment Management Corporation, Hermes GPE, China Investment Corporation, Queensland Investment Corporation, Aquila GP Inc. and Stichting Pensioenfonds Zorg en Welzijn.

Omers and USS declined to comment about whether they remain committed to investing in Thames Water or how this will affect their returns.

Thames Water, meanwhile, said it “remains focused on delivering for its customers, the environment and stakeholders”.

Thames Water said it received £500m of new funding from its shareholders in March 2023 and that it is “continuing to work constructively with its shareholders in relation to the further equity funding expected to be required to support Thames Water’s turnaround and investment plans.

“Ofwat is being kept fully informed on progress of the company’s turnaround and engagement with shareholders.”

It added that it continues to maintain a “strong liquidity, including £4.4bn of cash and committed funding, as at 31 March 2023”.

What a mess on this ongoing fiasco concerning Thames Water, the UK's largest water company.

In the latest developments, Faarea Masud and Esyllt Carr of the BBC report that Thames Water needs 'substantial' sums of money:

The UK's largest water company Thames Water will need "substantial sums of money" to stabilise its finances, the water regulator has said.

Ofwat boss David Black said talks between the firm and investors to raise the extra funding were continuing.

The water firm, which serves a quarter of the UK population, is billions in debt and is under pressure to fix its finances after fears it could collapse.

There have been calls to nationalise the firm after its boss quit last week.

"We need to see their revised business plan but we think it's substantial sums of money [that are needed]," Mr Black said, while being quizzed at a Lord's business committee.

Mr Black said problems were most acute at Thames Water, and that he did not see the same amount of issues at other companies.

The hearing came hours after it was announced that Thames Water had been handed a £3.3m fine for discharging millions of litres of undiluted sewage into two rivers in Sussex and Surrey, killing more than 1,400 fish in 2017.

Thames Water has faced heavy criticism over sewage discharges and leaks. The company leaks more water than any other water company in the UK, losing the equivalent of up to 250 Olympic-sized swimming pools every day from its pipes.

The company is also struggling with debts of nearly £14bn.

Amid fears that the water firm would collapse, the government said last week "a lot of work is going on behind the scenes" and that a process was in place "if necessary".

A few days later, one of the UK's largest private pension funds, Universities Superannuation Scheme (USS), became the first major investor to publicly back the firm to turn around its finances and performance.

But Mr Black said there may not be an appetite from current investors to put further money into water companies.

He said that the industry had built up too much debt from around 2006 and faced "deep seated challenges".

"I think we should have stepped in at that point to stop companies gearing up," he said, implying that water firms were taking on too much debt relative to equity, or available funds.

"We've changed companies' licences, we have got the powers to stop that happening now.

"At the time, we really didn't have the power to stop that happening," Mr Black said, adding that now Ofwat was "very much of the view" that companies need to reduce their debt to reasonable levels.

If the firm cannot secure investment, it could be placed under government administration until a new buyer is found.

Baroness McGregor-Smith asked Mr Black how much customers' water bills were likely to rise, given the £10bn investment water companies say they need to tackle sewage spills.

Mr Black said that he understood all water companies were "looking at requesting a bill increase" when they submitted their business plans to Ofwat later in the year, and that most of them were looking at "quite significant bill increases," but that the regulator was "yet to see the maths worked out."

When asked how much of the £10bn would be funded by increased customer bills, Mr Black said that was something that would be "examined as part of the price review".

However, he said that investment that involved companies "catching up on their current obligations," he thought was "an issue for them and their shareholders to fund".

But he added: "Where they're going above and beyond existing standards...that will be an issue for customers to fund ultimately. So investors would pay upfront and it's recovered from customers over time."

Any way you slice it, Thames Water is a big problem for OMERS, its largest shareholder with a 32% stake and BCI which owns a 9% stake in the water company drowning in debt.  

Other investors include sovereign wealth funds in Abu Dhabi and China.

Admittedly, I do not know enough about why Thames Water reached this point so I asked an infrastructure expert I trust who shared this:

I am not that close to the situation to be honest, but even from afar it’s clear that it is real mess.The good news is Thames will continue to operate. It’s just a question of what happens to the equity holders (they will probably be wiped out entirely) and whether the debt holders will need to take a haircut as part of the reorganization. If you dig back into the archives you will see that Thames has been in trouble for some time with accusations that Macquarie chronically under-invested in it and that the current investors over-leveraged it.

As far as Macquarie, another infrastructure expert told me that “Macquarie has a reputation for stripping an asset of all its value” adding “Thames was a cash machine prior to them acquiring it.” 

Also, Sarah Butcher of eFinancial Careers reports that Thames Water’s problems prompt calls for clawbacks:

Thames Water’s travails this week are shining a harsh light on what has hitherto been a highly lucrative place to work: Macquarie's European infrastructure business. 

Martin Stanley, the former head of Macquarie Asset Management (MAM), is the main man named on the Australian bank's communications concerning its disposal of Thames Water in 2017. Stanley, who ran the Australian bank’s infrastructure investment arm, stepped down in 2021. That year, he was paid AU$19.6m (US$13m, £10m); in 2020 he was paid AU$18.9m. Stanley can presumably afford a comfortable senescence.

While Stanley was the highest profile Macquarie executive associated with Thames Water, historic Companies House filings for holding company Kemble Water, reveal a long list of other Macquarie directors who worked on the investment. They include the likes of Edward Beckley, the former head of Macquarie infrastructure Europe, or Richard Greenleaf, who was also in Macquarie’s infrastructure team. Beckley left the bank in 2016 and is now at TPG in London.

As the British government prepares to step in to rescue Thames Water from its mountainous debt repayments, questions are being raised about how much Macquarie’s various infrastructure professionals were paid during their 11-year tenure as Kemble Water’s owners. More to the point, people are wondering whether there's any conceivable chance of retrieving any of it.

“People who benefitted from it, are responsible for this situation and they need to pay back!!,” says Ludovic Phalippou at Oxford’s Saïd Business School. “Macquarie partners probably got a lot of carry out of this deal. And will pay a reduced tax rate on that.”

Macquarie part-owned Kemble Water, which in turn owned Thames Water, between 2006 and 2017. Kemble Water itself was partly owned by a combination of the Macquarie European Infrastructure Fund LP, the Macquarie European Infrastructure Fund II, the Macquarie Diversified Infrastructure Fund, the Macquarie-FSS Infrastructure Trust, Macquarie PRISM Pty Ltd, and… LODH Macquarie Infrastructure Fund LP. 

It's not clear how much Macquarie executives received in carried interest for their efforts at Thames Water. Kemble itself bought Thames Water for £4.8bn in 2006 and Macquarie sold its 26% stake for £1.5bn in 2017, suggesting it made a profit of £300m, although it may have been far more than this. Carried interest typically accounts for circa 20% of profits made on the sale of an investment; the implication is that Macquarie's partners shared £60m at least.

While many of the Macquarie people are relaxing on the golf course, Thames Water's new owners (Canadian pension fund Omers and the Kuwait Investment Authority) are now struggling to service the £2bn pile of debt Macquarie left them with. A bailout is posited. 

There's no indication that Macquarie or anyone named in this article did anything legally wrong at Thames Water, but the financial gyrations it performed as the utility's owner are contentious. "I would be very inclined to insist on the clawing back of past dividends and private equity fees," says Daniel Davies, a banking analyst who also happens to write Morning Coffee for us. "Also to look around for some strict liability offenses with prison sentences attached. Nationalization at zero cost is the generous option."

Unfortunately, clawing back carried interest is unheard of.  Clawing back bonuses, however, is not. Macquarie's remuneration report contains a detailed explanation of the bank's clawback policies and the situations in which they apply. Although the bank's executives sold Thames Water at a profit, they have heaped opprobrium and reputational risk on their employer. That should surely count for something? 

Let me be clear, they should be clawing back those bonuses and Macquarie should be very embarrassed of its poor track record on Thames Water, it totally exposes its under-investment and raises serious concerns over its ESG practices.

Now, back in March 2017, Borealis Infrastructure (now called OMERS Infrastructure) and Wren House Infrastructure Management Limited (“Wren House”), the infrastructure investing arm of the Kuwait Investment Authority ("KIA") acquired a 26% stake in Kemble, the holding company of Thames Water, from Macquarie Infrastructure & Real Assets (“MIRA”).

At the time, Australia’s Sydney Morning Herald reported that OMERS and KIA acquired their 26% in Thames for US $2.4 billion adding:

Macquarie has a reputation for being focused on profit and tax minimization. During its tenure as the lead share holder of Thames, clients of the water utility saw spikes in fees while 646 million litres of water were lost daily to leakage, according to the Herald.

Ralph Berg, executive vice president & Global Head of Infrastructure for OMERS Private Markets, said: “Thames Water is the UK’s largest water company, a crucial provider of public utility services to almost a quarter of the UK’s total population. The geographical area the Company serves is amongst the most densely populated and economically vibrant in Europe and Thames Water’s commitment to deliver high quality customer service and value for money will receive our full support.”

Ralph was recently named CIO of OMERS, replacing Satish Rai, and soon after, Annesley Wallace stepped down as Head of OMERS Infrastructure. 

Now, I haven't had a chance to talk to Ralph (keeps a very low profile) or OMERS CEO Blake Hutcheson to get their views on Thames Water but it's a mess and I'm pretty sure nobody wants to talk about it publicly.

The same goes for BCI, I doubt CEO Gordon Fyfe or Lincoln Webb, their Global Head, Infrastructure & Renewable Resources, want to discuss this publicly.

Keep in mind, BCI was part of the Kemble Water Ltd. consortium in 2006, led by Macquarie that acquired Thames Water from Germany’s RWE AG for £8 billion, so it invested in Thames Water prior to OMERS Infrastructure. 

I don't blame OMERS and BCI for keeping mum on Thames Water, the prospect of their equity stake being wiped out if it gets partially nationalized or if debt holders are forced to take a significant haircut as part of the reorganization doesn't exactly sit well with them as that will eat away at their returns.

And if they follow Universities Superannuation Scheme (USS), the second biggest investor with a 19.7% stake in Thames Water and back the turnaround plan publicly, that requires major financial commitments on their part, something they might not be willing to do at his point given the crushing debt of the company and uncertain plans over rate hikes (ie. how much will UK citizens bear to modernize Thames Water).

Another equally troubling thing for OMERS and BCI is this company has violated many of their ESG principles and while the CEO Sarah Bentley resigned under pressure, many concerning practices have been happening under their watch (and other large investors).

One responsible investing expert told me flat out: "How can Canadian pension funds claim to be leaders in ESG and have this prized asset be so terribly mismanaged?"

She makes a good point. At one point, they knew Macquarie had severely under-invested and that a pile of financial and non-financial problems were going to come to the forefront.

What else? This whole Thames Water fiasco reminds me of the risks of investing in large foreign infrastructure projects:

  1. Currency risk (if the pound depreciates vs CAD)
  2. Regulatory risk (not an issue in UK)
  3. Nationalization risk (a serious issue for Thames Water even if it’s partial)
  4. Interest rate and debt risk (as rates shoot up and stay high, cost of servicing debt crushes company)
  5. Reputational risk (Thames Water has more leaks than I can keep up with, doesn't look good for Canada's large pension investment managers which own tons of UK infrastructure when OMERS and BCI are cited as owners and it doesn't help their reputation as ESG leaders)

All this to say, just by reading these articles, I'd be inclined to advise OMERS and BCI to take their lump and walk away from Thames Water.

Let me also be clear, it's not just their problem, other large investors are on the hook too but they are part of the "Maple Eight" and really need to think carefully about their next steps here.

Also, can't say I'm terribly impressed with Macquarie, they left BCI and OMERS with a pack of issues they didn't address as they raped and pillaged this company dry.

I don't mince my words, this whole Thames Water fiasco is a real mess and the sooner BCI and OMERS can put it behind them, the better off they and their members will be.

Let this be a lesson to all of Canada's large pension investment managers who barrelled into private markets without carefully thinking of all risks, including reputational risk.

I leave you with some more food for thought.

Sandra Laville, Anna Leach and Carmen Aguilar García of the Guardian report on how privatisation drained Thames Water’s coffers:

In a little over three decades, Thames Water, the biggest water and sewerage company in England, serving 15 million people, has transformed from a debt-free public utility into what critics argue is a privately owned investment vehicle carrying the highest debt in the industry.

Over those years – as admitted by Sarah Bentley, the firm’s departing CEO – its executives and the shareholders and private equity companies who own it have presided over decades of underinvestment, aggressive cost-cutting and huge dividend payments.

The symptom of these decades can be seen in the scale of sewage discharges, the record leaks from its pipes and the state of its treatment plants – which are now at the centre of a criminal investigation by the Environment Agency into illegal sewage dumping and a regulatory inquiry by Ofwat.

Analysis of the accounts of Thames Water between 1990 and 2022 reveal a story that is echoed to some degree across the industry. The figures show how privatisation – which was intended to lead to a new era of investment, improved water quality and low bills – turned water into a cash cow for investment firms and private equity companies, none more so than the Australian infrastructure asset management firm Macquarie which, with its co-investors, bought Thames Water in 2006 from the German utility firm RWE for £4.8bn.

By the time Macquarie sold its stake in Thames Water in 2017, debts had more than tripled from £3.2bn to £10.5bn, unadjusted for inflation. Its pattern was to borrow against its assets to increase dividend payments to shareholders.

By 2017, when Macquarie sold its last stake, the pattern of debt remained, and the rate of accruing debt continued on the same trajectory.

Macquarie and its co-investors made their position clear from the start, hiking dividends in the first year of their operations, 2007, to £656m when profits were a fraction of that at £241m.

Over their 11 years of control, Macquarie and its co-investors paid out £2.8bn to shareholders, which is two-fifths of the total £7bn in dividends that Thames Water has paid between 1990 and 2022. The average yearly dividends paid during the Macquarie period were five times higher than those paid after it sold its final stake in 2017. 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 31 March 2022.

Ofwat recommends that companies maintain a ratio of debt to capital value of 60%. But Thames Water’s debt now amounts to £14.3bn – almost a quarter of the total £60bn debt run up by the privatised water companies in just over three decades.

This weight of debt is at one of the highest levels in the industry, with Thames Water’s gearing at 80%. More than half of this debt is inflation-linked, leaving Thames facing hikes on its debt repayment, even as it is being told to invest billions more fixing the infrastructure which has been left to crumble.

This article was amended on 1 July 2023 to temporarily remove the graphic on “gearing” pending a review of the figure shown for Severn Trent. A previous version mistakenly said Severn Trent’s gearing was 83.7% at March 2022, when the correct figure was 59.2%. However, the revised graphic, published on 3 July, now uses the latest figures for each company - based on their own financial reports - rather than March 2022 data. Figures for several of the water companies have been amended as a result, and the graphic’s source information has been updated accordingly.

Lastly, Bryce Elder of the Financial Times reports it's time to let Thames Water die to teach everyone a lesson, according to Citi:

Our world is awash with opinions on Thames Water. Here, from Citigroup analyst Jenny Ping, is another:

Ofwat has been criticised for not being tough enough as a regulator, especially with companies taking cash out of businesses rather than investing back into the business. If one or more water utility in the UK were to financially collapse, we believe this could actually help Ofwat to show they were tough enough on the sector, with those who don’t deliver on the license obligations fail to exist. This could put pressure on Ofwat to ensure this does not become an endemic sector wide issue and make it easier to propose a set of fair regulatory proposal for AMP8.

The AMP in AMP8 stands for asset management period. It’s Ofwat’s framework for allowed returns that’ll run for five years from April 2025. Citi argues that if Thames Water dies between now and then it’ll prove the current regime is fit for purpose, which “could actually be a positive for the sector”.

What exactly Citi means by “collapse” isn’t defined. As has been discussed at length here and elsewhere, Thames Water’s regulatory assets are ringfenced within the operating company so the buck stops for investors at holding-company level. The government’s choice, if push came to shove, would be between injecting equity at the topco level or just above the ringfence.

To remind, there’s £14.3bn of debt attached to Thames Water’s opco that’s secured on £17.9bn of regulated operating assets. Though shareholders would almost certainly be wiped out by any kind of government intervention, an equity injection just above the ringfence has the convenience of safeguarding the assets while only zeroing junior debtholders — as in, the Kemble entities that are wholly dependent on opco dividends.

Of all the bailout paths available, this is probably the least bad. It’s also what the market has been assuming, by a balance of probabilities, since Thames Water hit the front pages last week. But because nothing had to happen immediately, and because no one’s prepared to talk about the specifics of a contingency plan, certainties are few and reducing.

The cannon-fodder junior debt has rallied for three straight sessions to trade at around 60p in the pound while opco debt — the ringfenced stuff with creditor protection via the whole business securitisation — drifts wider. There’s also a hint of sector contagion. Nationalisation threats might have been intended to cajole Thames Water investors into putting in more equity but talk of crisis can be self-fulfilling, particularly within a sector that suppurates with resentment.

Publicly, water companies pitch stakeholder engagement and self regulation as the best ways forward — see the leaked memo from Severn Trent CEO Liv Garfield about how utilities should rebrand as “social purpose companies” so they’re “attractive to the Labour leadership”. Privately, there’s a want to somehow sell the idea that underinvestment has been a benefit shared.

Here (via email) is how a specialist-sales trader at JPMorgan sums up the scene:

There is something especially upsetting about those trusted to deliver clean water actually polluting our rivers and seas because of decades of under-investment in the system. Extracting billions in dividends and over-leveraging the sector adds an egregious economic angle to that environmental neglect. The sector was privatised debt free and now carries £60bn of debt — or nearly 70% of aggregate Regulatory Capital Value (RCV).

It’s all wrong! These monopoly utilities have over-leveraged social assets and made exceptional gains. The health of our environment and the sanctity of water security have been ignored. Many suggest the regulator has allowed this to happen over decades of cosy co-existence. Those people would argue OFWAT is unfit for purpose. The case for nationalisation to punish the ’evil financiers’ and regain control of critical natural monopolies becomes compelling…until we consider the practicalities of finding a solution.

Today we need investment. New reservoirs, replacement pipes sewers, improved efficiency and this is not a challenge which public ownership will readily solve. Jeremy Hunt does not want to incorporate the industry’s £60bn debt onto his balance sheet nor fund the vast burden of remedial capex ahead.

So whilst we want revenge, we actually need rapprochement. It takes a good deal of emotional dexterity but the answer is to offer higher returns for much-needed capital spend — and to fund it through the only means possible higher bills. None of us would choose to start from here. It doesn’t seem fair or right. But there is no alternative. Cheap bills were the other benefit of decades of underinvestment in UK water infrastructure…That era of cosmetic, short term good times is over. Water prices must rise to allow the necessary investment to flow into the sector. Those returns will accrue to private capital but that is capitalism… Natural monopolies require private sector capital in concert with powerful regulation to ensure the preservation of long-term system integrity not simply its immediate monetisation.

Water utilities need to publish their plans for the AMP8 business plans by October. The government and Ofwat had been indicating before the crisis that bills would be allowed rise, but have since appeared paralysed as profiteering and dead fish came to dominate the discourse.

In these circumstances it’s not completely unreasonable to think, as Citi’s Ping argues, that everyone’s bargaining position might be helped in the long run by a ritual sacrifice.

Will Thames be sacrificed or let to drown on its mounting debt? It certainly looks that way and I agree, you need to the private sector, higher water bills and better regulations to tackle years of chronic under-investment in water utilities.

The problem, of course, is in a high inflation environment the UK is experiencing right now, hiking up water and other utility bills is political suicide. Good luck with that.

Below, Channel 4 News reports the government says it is working behind the scenes to ensure that Thames Water customers won't be impacted as rumours circulated today that the company, which is £14bn in debt, is on the verge of going bust. Also see interview at minute 9 on Thames Water.

Also, GBNews reports Thames Water is on brink of collapse, 'why is it only now that they're trying to sort something out?!' 

Lastly, Thames Water was just fined £3.3 million after it discharged millions of liters of raw sewage into two rivers and killed 1,400 fish. The water company released the sewage from treatment works near Gatwick Airport in October 2017 into the Gatwick Stream in Sussex and the River Mole in Surrey. 

What a sewage of a mess for OMERS, BCI and other large investors to sort through. I say dump it and take your hit because either way, it looks to me like equity holders will get wiped out. 

Just make sure you learn your lessons from this mess.