Thames Water: Decision time for Ofwat

At the time Ofwat elected not to exercise its powers of enforcement, which included the power to issue an enforcement notice under s.18 of the Water Industry Act 1991. Had it done so, Thames’s inevitable failure to remedy the loss of those ratings would have entitled Ofwat (or the Secretary of State for the Environment) to proceed in short order to petition the High Court to place Thames into the special administration regime (“SAR”) under ss. 23 and 24 of the Act, which would have in turn entitled the administrators appointed to seek a new owner for Thames and in due course transfer it to the selected acquirer. 

Ofwat chose not to do that, but instead to give Thames an unspecified period of time in which to negotiate and implement a financial restructuring and new equity raise that would restore it to a position of financial strength and, just as importantly, compliance with the terms of its licence and broader statutory obligations. Pursuant to undertakings agreed with Ofwat, Thames’s primary “remediation objective” was to “take all reasonable steps to address the concerns raised by its credit ratings agencies and to restore two Investment Grade Ratings in line with Condition P26 of the Licence”. To that end, amongst other things, Thames was to “dedicate appropriate resources and take all reasonable actions to establish long term financial resilience and with the objectives to deliver a successful outcome to the Equity Raise, to maintain access to debt capital markets and to ensure it has funding and plans in place to enable [it] to meet its statutory and regulatory obligations over the long term”. 

It is perhaps a matter of surprise that Thames’s undertakings were open-ended in time rather than subject to a backstop date. But their purpose was clear, as Ofwat said at the time, “Thames Water must take responsibility for developing its plans to turn around its operational performance and to address its financial position, and must do so at pace and with urgency, if the company is to put itself in a position where it can meet the needs of customers and the environment in both the short and the long-term.” And there was a limit imposed on them by reference to the Remediation Objective of restoring investment grade ratings: Thames formally acknowledged that “Ofwat may propose that the Remediation Steps … are either modified or supplemented and/or additional Undertakings are provided … if Ofwat considers that the current Undertakings (or [Thames’s] performance of or compliance with them) will not be, or are unlikely to be, sufficient to achieve the Remediation Objective, and without prejudice to Ofwat’s duty to take enforcement action.” Ofwat acknowledged that it was “under a duty to pursue an enforcement order where a water company fails to comply with the undertakings it has provided”.

Over the course of two years, Thames has raised and spent a vast amount of money in the wake of the undertakings it gave. In early 2025 it raised £3 billion in additional debt facilities from existing creditors to fund runway in that respect. It then sought, unsuccessfully, to sell itself to a third party investor on terms that could be agreed with both the third party and its own creditors. Having failed in that respect, Thames’s senior creditors fell back on a plan to purchase Thames themselves via a company they had established as a bidder called London and Valley Water (L&VW). L&VW and Ofwat have since been in negotiations for over a year, but they have not come to fruition and parties have evidently been a material distance apart. And we are approaching crunch time: Thames recently announced that existing liquidity is expected to support operations until the fourth quarter of 2026, but additional funding will be required if L&VW and Ofwat cannot agree on its recapitalisation.

The negotiations have only been partially publicised, but it is obvious that a key stumbling block is L&VW’s insistence that Thames should be granted substantial relief from the need to comply fully with its licence and statutory obligations (including environmental targets) for a period of time. That insistence is tied to the financial strength of Thames following a recapitalisation under the L&VW proposal – in turn largely a function of (i) the amount of existing debt that the creditors of L&VW are prepared to write off or convert to equity, (ii) the amount of new equity that they are prepared to inject and (iii) the impact of (i) and (ii) on the quantity and cost of new debt that Thames would be able to raise.  

In this respect it is clear that, notwithstanding incremental improvements in the L&VW proposal over the last year, its controlling senior creditors have baulked at a restructuring that would restore Thames rapidly to compliance with its licence and statutory obligations going forward, including the fundamental “remediation objective” of recovering its investment grade ratings. In March 2026, for example, Thames responded to speculation about the L&VW proposal, noting that L&VW was simply “assuming” that its then current recapitalisation proposal would “provide the foundation for a return to an investment grade credit rating”. 

Instead, L&VW’s objective has been for Ofwat to accept a slower and (at least in the short term) cheaper path to compliance pursuant to their proposal – with an embedded risk of falling short that, of course, flows through to consumers and taxpayers.  As of this week, they have sought to sweeten the pill by offering the government control rights in the form of a golden share, but it is doubtful that such rights can be an adequate substitute for the incremental financial concessions required to strengthen Thames’s balance sheet to a position that would deliver greater speed and certainty with respect to the remediation objective and compliance more broadly. 

That is a problem, as there would be very serious questions as to the lawfulness of Ofwat accepting an outcome that was inconsistent with the statutory regime and the undertakings that Thames gave in order to obtain what is now two years of breathing space. And Ofwat would be doing so in circumstances where there was an obvious and tailor-made alternative, namely SAR. 

Under SAR, the objective of administrators is to ensure that Thames is run for the purpose of transferring it to a new owner (or restructuring it – see below) on a basis which puts it in full compliance with its licence and statutory obligations. They have considerable statutory powers to achieve that outcome. Most notably, if administrators were to pursue a transfer of Thames, they would not be required to obtain the consent of existing creditors to do so. Instead, the creditors would simply get what was available to be returned on their secured debt, i.e. whatever the selected new owner and the administrators had agreed by way of purchase price for Thames or its assets, net of the costs of the SAR process. The creditors could, if they wished to, bid in an SAR themselves, through L&VW or any other entity. But it would be up to the administrators and not them to determine whether their bid or another bid should succeed. Amendments to the legislation indicate that, given a water company’s statutory functions and duties and the purposes of the SAR regime, it is not a simple matter of identifying the best headline price offered.

It is notable in this respect that Thames and its creditors have been keen to characterise the process in which they are currently engaged as a “market solution”. But the only market participants as matters stand are the existing senior creditors, or a large subset of them, acting in coordination as a group. By contrast, under SAR, the universe of potential owners is not confined to existing stakeholders: it can include any suitable public, mutual or private entity. One can contend quite reasonably that SAR is the truer “market solution”.

Why then the reticence when it comes to SAR? It is after all the very process that the legislature designed, and in recent years carefully tailored, to fix a water company in the position that Thames is currently in. 

One can speculate as to anxieties that may be in play. The first is whether there is currently a legal basis for triggering SAR. Only Ofwat or the Secretary of State can present a petition, broadly speaking on one of two bases: either (i) a breach by the company of a principal duty to provide a water or sewerage system or of an enforcement order issued by Ofwat (e.g. in relation to a licence breach); or (ii) a state of insolvency in the statutory sense (inability to pay debts as they fall due). When it elected to take undertakings two years ago, Ofwat effectively deprived itself of the ability to act for a period of time on either basis: it could not rely on the breach of the licence as the basis for an enforcement order as it had taken undertakings in lieu of doing so, and it could not safely rely on the insolvency ground provided that Thames was able to raise sufficient liquidity to keep itself going (as it then did) and had some prospect of achieving a restructuring. 

But what is the position now that we are two years on without a solution that satisfies the purpose for which Ofwat took the undertakings? There is certainly a case to make that the undertakings have not been and will not be complied with, as after extensive negotiations, it seems there is still no proposal which will rapidly restore Thames to full compliance with its licence and statutory obligations. Instead there is a proposal which, in effect, requires Ofwat to agree further or amended undertakings in lieu of enforcement action, which Ofwat is not bound to do. That being the case, Ofwat should be able to give Thames notice that the undertakings have not been delivered on and that it will treat them as terminated after a period (indeed it specifically recognised that it would be under a duty to enforce if the undertakings failed). 

If Ofwat did so, there would be two consequences: firstly, it would again be in a position to issue an enforcement order against Thames which would entitle it in time to present a SAR petition; secondly, the effect of such action would very likely trigger a default under Thames’s debt facilities so as to render it insolvent (an alternative and more immediate basis for presentation of a petition). Thames may run out of liquidity in any event, given it can only sustain operations through the end of 2026 based on its existing funding. The commercial and legal reality is that the failure to deliver on the undertakings and the risk of insolvency are heavily intertwined. 

There is an important wrinkle in this respect, which is that the statutory objectives of SAR differ depending on whether a petition is presented on the basis of non-compliance or the basis of insolvency. In the former case, the administrators’ ultimate objective is solely to transfer Thames to a new owner. In the latter case, the administrators have a primary duty to consider whether Thames can be recapitalised with the agreement of its existing stakeholders rather than be transferred. In the current context, the distinction may be one without a difference, as the administrators need not pursue financial restructuring efforts if they conclude that transfer is the more effective way of restoring Thames to compliance with the statutory regime. Where, as in this case, there have been lengthy restructuring efforts outside of SAR that have not delivered, administrators might well conclude that a transfer was the way to go. Alternatively, Ofwat could elect to proceed with an enforcement order and then petition solely on the grounds of non-compliance, making the issue academic. 

The second anxiety may be that HMT will need to fund the very substantial additional liquidity required to run a SAR to its conclusion. But here it is important to understand that HMT is protected by an amendment made to the SAR legislation in 2024. In short, HMT will have a super-priority right of recovery of its funding from a new owner of Thames. This is what happened in the SAR of Bulb Energy pending its ultimate transfer to Octopus Energy, with the result that the ultimate cost to the taxpayer was negligible. 

A third and related area of anxiety may be business disruption associated with a SAR, given that a formal insolvency process generally gives rise to contractual rights of termination for counterparties (e.g. suppliers of goods or services to Thames). Although counterparties cannot enforce their historic claims in a SAR process, they might withhold further services – a risk that Thames and its creditors have been keen to emphasise. But it should not be overstated, as it is tightly linked to the question of funding. If HMT were to provide funding to Thames on the protected basis described above, then Thames’s business would continue under the statutory protections offered by SAR. Moreover, it would continue on a basis that could be expected to result in a very substantial strengthening in its financial position upon exit from SAR. In the circumstances, counterparties should continue to want to deal with Thames, as it will be able to pay them. 

A fourth area of anxiety might be litigation risk associated with the SAR process. It is undoubtedly true that some of Thames’s senior creditors are known for pursuing litigation aggressively for strategic purposes. It is predictable, for example, that a petition (or action taken in preparation for a petition) would be contested by Thames or its senior creditors. Or it might be that an administrators’ decision to accept one bid over another would be challenged. But such disputes are typical in a large formal insolvency process and precisely what our courts are there for. They are well capable of being resolved as a matter of urgency (as was the case early last year when Thames’s restructuring plan was rapidly contested in both the High Court and Court of Appeal). 

A fifth area of anxiety might be that SAR would be perceived as “business-unfriendly” by a UK Government intent on attracting long-term investment in infrastructure. But it is hard to see the logic in that, in circumstances where Thames and its senior creditors have already been given very substantial leeway to restore Thames to compliance. Moreover, major stakeholders in L&VW are very experienced distressed debt investors (rather than primary infrastructure investors), whose business model centrally entails investing with the knowledge of the risk that, if a consensual solution cannot be agreed, a formal insolvency process such as SAR will follow. Such investors acquired their debt positions in Thames in the secondary market with their eyes wide open to that risk.

A sixth area of anxiety might be as to ultimate outcome. But, again, there is no obvious reason to distrust the process that the legislature has carefully designed (including the extensive powers that administrators have been given) to ensure that Thames is transferred or otherwise reconfigured on a basis that efficiently restores its compliance with its licence and statutory obligations for the benefit of its stakeholders (and above all consumers) going forward. As noted above, senior creditors are not entitled to veto a transfer to a new owner at a price that administrators conclude best secures such compliance going forward. Creditors can always choose to bid themselves, but not on the basis that they have pursued to date, i.e. seeking material relief from compliance going forward. This is the fundamental distinction between SAR and the negotiated process we have seen outside of SAR: the outcome must be one that secures compliance with, rather than departure from, the statutory regime.