The financial crisis that has engulfed Thames Water is largely due to two Chinese state-owned banks.
Bank of China and Industrial and Commercial Bank of China were among the lenders who backed a £190-million loan that Kemble Water Finance took out, the parent company of Britain’s largest water provider.
Kemble is supposed to repay this loan at the end this month, but it is likely to miss this repayment after nine of the utility’s shareholders decided last week to withhold £500,000,000 in new equity they had promised to inject into this heavily-indebted group.
The fate of the company depends on the outcome in the restructuring talks, which include the banks controlled by Beijing. If the utility defaults, the Chinese bank and other lenders, including the Dutch lender ING, and Allied Irish Bank in Ireland, may become shareholders.
The involvement of Beijing in is heightened by the role of Chinese banks. China Investment Corporation (the sovereign wealth fund) is one of the shareholders with an 8.7% stake.
This is likely to increase concerns about Chinese influence in Britain. In recent years, the government has taken steps to reduce Chinese involvement in UK infrastructure due to growing concerns over the security threat Beijing poses.
After the government started to crack down on Shenzhen based Huawei in 2020, kit supplied by Huawei was banned from important networks. In 2022, a Chinese state-owned energy group bought out the Sizewell C project.
Sir Iain Duncan Smith said that Beijing’s influence on the future of Thames Water is concerning, because the utility, like nuclear power, should be seen as a strategic resource. He said that “water is the basest asset in the world”.
Thames Water is in a difficult financial situation due to the steep rise in interest rates that began in late 2021. This has made it costlier for the group’s gross debts of £18,3 billion. The utility has also been hit by fines for sewage pollution and leaks.
The situation escalated when, last week, Omers, Canada’s pension scheme and Britain’s Universities Superannuation System, along with other shareholders, announced that they would not inject £500 million by the end March, as they had promised.
They said that this was due to the fact that Thames Water has been made “uninvestable”, by Ofwat’s stance. Ofwat had refused a deal offered by the utility, which would have allowed it to lift its bills and face lower fines. This has led to an impasse that could lead to the Government temporarily renationalising Thames Water.
Fitch, one of the leading rating agencies, cut Kemble’s rating from CC to CC on Thursday. Fitch stated that “we believe some form of default will occur.” Even if lenders agree on extending and amending the upcoming loan it is likely that this agreement will constitute a distressed credit exchange under our criteria. This would trigger a downward downgrade for Kemble upon completion.