Thames Water creditors prepare for legal fight over possible nationalisation

Consortium preparing for potential legal battle amid reports new PM could put the company into temporary public ownership

The group of investors pursuing a rescue bid for Thames Water have said they are willing to discuss greater public control but are also preparing for a potential multi-billion pound legal battle amid reports that Andy Burnham could temporarily nationalise the company.

London & Valley Water (L&VW), a consortium of 100 institutional investors that hold £17bn of the company’s £21bn debt, has said it is open to government involvement with Thames Water , but indicated that this does not include public ownership in the struggling company.

Mike McTighe, the corporate troubleshooter who is leading the governance overhaul and building the new board proposed for Thames, Britain’s biggest water company, said the consortium wanted to work constructively with Burnham when he takes over as prime minister.

“We are keen to meet new ministers as soon as possible to discuss how we can work together in the best interests of customers, including by enhancing public control of the company’s operations,” he said. “We will work with Andy Burnham, his government and local authority leaders to rebuild confidence in Thames Water and the wider sector.”

The comments by McTighe, who is likely to take over as Thames Water’s chair if the consortium is able to get its £10bn rescue deal approved by the government, follow reports that Burnham is planning to transfer the company into a special administration regime (SAR), a form of temporary public ownership, after he takes over as prime minister.

Burnham said last month that there should be “greater public control” of Thames Water and told the Guardian this could mean nationalisation.

The SAR proposal would transfer the costs of running the company to the taxpayer, with Thames Water’s creditors claiming the bill could come to £2bn.

“If it is going to cost the taxpayer £2bn to keep the company afloat then the taxpayer needs to receive something in return; that means control, so that we can fix the company and secure the water supply for thousands of families and businesses,” a Burnham ally told The Sunday Times.

L&VW, which includes fund managers such as Apollo Global Management, Elliott Management, Farallon Capital Management and Silver Point Capital, has also moved to strengthen its legal position in order to be prepared if Thames is nationalised.

The consortium has hired top litigation and disputes firm Pallas Partners to work alongside Akin Gump, the law firm advising the consortium on the terms of their restructuring proposals.

“Creditors are assessing all potential routes that the situation regarding Thames Water may play out,” said one person close to the consortium. “They want, and need, to be ready. There is no legal action being taken at this point. This is purely a precautionary measure.”

Earlier this month, Thames Water’s creditors were said to be still willing to pursue their bid for the debt-laden company, even if Burnham were to bring it into temporary nationalisation .

“The consortium is trying to pursue a solvent restructuring,” said the person. “This would avoid a taxpayer funded administration process and help creditors recover as much as possible. It can bid alongside any others, but that prolongs everything.”

The future of Thames, which serves 16 million customers in London and the Thames valley and is buckling under interest payments on debt it has run up since privatisation, will be one of the most pressing issues in Burnham’s in-tray when he enters Downing Street.

“We remain ready and willing to recapitalise Thames Water, return it to investment grade, and begin the long process of turning it around,” said McTighe. “We urgently need government engagement to begin that process.”

McTighe is the chairman of Openreach, BT Group’s infrastructure arm, and previously chaired the Daily Telegraph’s publisher.

The lenders have been trying to take ownership and bring it out of administration after a failed attempt to sell the utility to the US investment group KKR last year.

However, the creditors’ plans were thrown into doubt last month when Emma Reynolds, the environment secretary, wrote to the regulator, Ofwat, voicing concerns about the terms of the deal .