The problem for Thames Water is that almost half of their debt is floating rate, that is, the interest rate they pay increases or decreases with the rate of inflation.
- Jun 30, 2023, 4:00 PM CDT
Thames Water’s owners extracted capital from the business via dividends regardless of earnings levels, added massive amounts of debt, and underspent on capital expendituresPrivatization with competition was the mantra for 1980s neoconservatives. In the US, they wanted to sell the Tennessee Valley Authority and municipal water suppliers. In Mexico they sold the telephone company and in Argentina, well, everything. In Spain and Italy they sold off holdings dating back to the fascist regimes.
Amateur analysts have attributed the company's financial woes to excessive debt leverage which totaled 82% last year. Yes this is high by US and UK standards but typical in say Japan whose utilities are rated solidly investment grade by Moody’s and S&P. And debt is almost always cheaper than equity. So a highly indebted capital structure may actually serve the public’s interest if it provides capital funding at lower costs than those demanded by equity investors. .
The last question to address here is why is this financial distress occurring now? In the utility business there are only two “silent” killers—negative customer growth and inflation. Inflation adversely affects utilities because the business is so uniquely capital intensive. Utilities are essentially construction and finance entities which operate what they build.
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