Thames Water, part-owned by QIC, is in trouble and Britons blame Macquarie

Thames Water is leaking sewage and on the brink of collapse but it’s Australia’s Macquarie Bank that Britons blame for the dilemma and investors such as QIC for failing to pump money in.

Cambridge University men's rowers blamed dirty water for falling ill before a race against Oxford University. Picture: AFP

Macquarie Bank is in the sewer, as its former infrastructure investment Thames Water — that the bank loaded up with debt during its ownership — looks on the brink of financial collapse.

And to make matters worse, the utility has quadrupled the number of sewage spills into London’s famous river.

Macquarie owned as much as 48 per cent of Thames Water before selling its stake seven years ago. It’s still a significant debt holder and the Queensland government’s wealth fund, QIC, is currently a 5.35 per cent equity holder.

Now the UK’s largest water company by customer numbers faces the very real prospect of administration as it fights with the UK regulator over the fees it charges customers.

The consortium that owns Thames Water, Kemble Water Finance, is due to repay a £190m facility on April 30 and its equity owners, which include QIC and the Abu Dhabi sovereign wealth fund, have just said they will not be making this repayment.

Kemble has about £1.4bn of unsecured debt, of which Macquarie holding 9 per cent through its unlisted Macquarie Infrastructure Debt Fund. That debt comes on top of the more than £14bn of net debt that sits within Thames Water.

Creditors in the existing tranche due for will have the right to call in administrators if Thames Water shareholders stand firm on their refusal to repay the loan, or else the British government could move to renationalise the asset.

A Macquarie insider said its circa £130m of lendings to Thames Water was not in the current tranche due to be repaid.

The reasons why two Australian firms have found themselves involved in the potential failure of such a key UK asset comes back to the need of the nation’s $3.7 trillion of superannuation funds to find infrastructure assets with stable returns. It’s the same reason “big super” owns most of the nation’s ports, airports and toll roads.

In this case, Macquarie snapped up what appeared to be a no-brainer. Thames Water provides water to one of the most visited cities in the world that was set to host the Olympics.

By Macqaurie’s account, Thames Water spent more money upgrading its “Victorian-era water and wastewater infrastructure” during its 11 years of ownership – about £11bn – than it ever had before and that its increase in debt was due to the asset’s value increasing.

“During our part-ownership, Thames Water more than doubled its regulated asset base from c.£6bn to c.£13bn thanks to the record levels of investment in the network,” the company wrote in a letter to UK fund holders last year.

That letter came in response to images of the impressive English manors owned by Macquarie’s Martin Stanley and Ed Beckley were splashed in the UK press when the problems at Thames Water first bubbled up.

“This (investment) was partly funded by additional debt, which increased from c.£6bn to c.£11bn over the same period. At all times during our ownership the regulated entity of Thames Water maintained an investment grade credit rating,” Macquarie went on to write.

The company’s shareholders also paid themselves £1bn in dividends during this time, which in Macquarie’s case went to its fund shareholders, while the bank received performance fees from those funds and a massive equity kicker when it sold its stake.

The company certainly looked appealing enough to QIC and others when they purchased it from Macquarie Bank, but clearly the infrastructure investments made were not enough to stop the firm being responsible for a quadrupling of sewage spills into the River Thames last year, according to data analysed by London’s City Hall.

Macquarie would not answer questions as to whether it would support a push to have its debt holdings converted to equity as a way of recovering its borrowings, but was defensive of its time as an owner.

“We supported Thames Water as it delivered a record £11bn of capital investment in its network, helping to reduce water leakage by 22 per cent while keeping customer bills amongst the lowest in the country,” spokeswoman Lisa Jamison said.

QIC would not put forward an executive to answer why Thames Water has not conducted the necessary infrastructure upgrades to keep England’s pipes working, nor what it would like to see happen if it does not win its fight to increase prices.

QIC and Thames Water’s other shareholders, including Abu Dhabi’s sovereign wealth fund, “are not in a position to provide further funding to Thames Water,” following the failure of talks with UK regulator Ofwat, said QIC in a written response to questions.

Those talks included “both meeting current funding demands and the urgent need for substantial investment to improve performance,” said QIC’s written response.

“However, after more than a year of negotiations with the regulator, Ofwat has not been prepared to provide the necessary regulatory support for a business plan which ultimately addresses the issues that Thames Water faces.”

The Thames Water shareholders had proposed investing £18.7bn over five years to fix the sewage spill problems and water shortages during the summer months but wanted raise price, something the regulator has not yet agreed to.

British Prime Minister Rishi Sunak’s government faces a difficult challenge in an election year when the cost-of-living crisis continues to take a toll on Britons.

Its regulator hasn’t yet said no to Thames Water’s request to increase its pricing cap and doing so would not help at the ballot box. Taking back the asset and spending the required funds to get Thames Water back on track is also unlikely to appeal to a conservative government.