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The UK government is updating water company insolvency laws as fears grow over the financial health of the privatised monopolies — including the country’s largest, Thames Water.
The Department for Environment, Food and Rural Affairs last week quietly issued legislation to update the three-decade-old special administration regime for water monopolies in England and Wales.
The new law provides more options for special administrators to restructure companies that are unable to repay their debts and may make it less likely that the government is forced into renationalising water utilities.
The update comes as fears grow over the financial stability of Thames Water, which is owned by private equity firms, pension funds and sovereign wealth funds.
The company provides water and sewerage services to about 25 per cent of the UK population and is struggling under the weight of its £18.3bn group debt burden.
The legislation contains provisions that will allow a water monopoly to enter administration, restructure its borrowings and then exit as a “going concern”.
Under the current rules, water company assets have to be sold off, and the corporate entity liquidated, if they go into administration. The new rules would allow existing shareholders to potentially retain a stake.
One restructuring lawyer said the new rules could help the government avoid the costs of temporary or permanent renationalisation because a restructuring that retains existing shareholders would be easier.
The lawyer also warned that creditors might suffer bigger losses than they might have under the current regime.
The government said it would take “no ownership or management” of a company under the special administration regime.
Another change enables special administrators to transfer the water company’s assets to a subsidiary and then sell the shares in that subsidiary.
Kate Stephenson, partner at law firm Kirkland & Ellis, said this change was “intended to maximise value on a sale — by ringfencing the value and enabling potential tax savings, thereby attracting buyers”.
The update, which the government expects to come fully into force by the spring, also ensures that the special administration regime can be used as an “enforcement” tool against water companies that have “performance” issues, according to a Defra guidance note on the legislation.
These include a utility breaching its “statutory functions or licensed activities to such an extent that it is inappropriate for the water industry company to hold its appointment,” Defra said.
Experts added that this could include water supply and sewage pollution issues. Water companies are facing a number of court cases over sewage pollution that could find them in breach of licence conditions.
Colm Gibson, managing director at Berkeley Research Group, said investors should pay attention to the “increasing emphasis on using special administration for companies that perform poorly”.
“These changes make it harder for shareholders to mount a legal challenge if they disagree with the special administrator,” he added.
Defra said the “modernisation” of the law was intended to ensure that the “legislation for the Water Industry Special Administration Regime reflects modern insolvency and business practices . . . and to ensure the uninterrupted provision of vital public services”.
The special administration regime for water monopolies in England and Wales was drawn up soon after the industry was privatised in 1989.
It allows the regulator, Ofwat, or the secretary of state to appoint special administrators from private insolvency companies to manage the business in the case of a financial collapse so that essential services can be kept running.
Ofwat is concerned about the financial stability of several water companies, which are facing higher energy, labour and financing costs. They have asked the regulator to agree steep increases to customer bills between 2025 and 2030. A draft decision is expected in June.
Thames Water said: “Thames Water Utilities Limited is in a solid financial position and has supportive shareholders.” Ofwat declined to comment.