Thames Water debt emergency seized on by US hedge funds
A combative Wall Street hedge fund is positioned to play a central role in the future of Thames Water after scooping up the company’s loans at knockdown prices.
New York-based Elliott Management is among a pack of aggressive US players to have hoovered up Thames Water debt at steep discounts in an attempt to capitalise on the financial uncertainty engulfing Britain’s largest water supplier.
Elliott, which manages assets worth around $65bn (£50bn), has snapped up cut-price bonds running into many hundreds of millions of pounds. It now ranks among the largest lenders in a pool of an estimated 90 financial institutions that Thames counts as senior creditors.
Elliott’s position is said by City sources to be worth close to £1bn, placing it at the heart of a rescue attempt being prepared by a select group of the largest lenders.
A club of prominent creditors is poised to begin detailed work on a radical financial restructuring proposal that aims to repair Thames’s stretched balance sheet by writing off a significant portion of its debt, at the same time as finding new shareholders willing to pump in fresh equity.
It comes as ministers seek a solution to the Thames crisis that will avoid emergency nationalisation and a further threat to the overburdened public finances.
Solving the company’s dilemma is said to be top of a “s--t list” of pressing problems drawn up by Sir Keir Starmer’s chief of staff, Sue Gray, while the Prime Minister himself said in July that nationalisation would “not be consistent” with Labour’s fiscal rules.
Billions of pounds of Thames’s senior bonds have been snapped up at a discount to their face value by hedge funds in trading over the summer.
Blue-chip fund managers have been rushing to dump Thames debt amid fears that ministers will ultimately have to step in with a taxpayer-backed bailout package that would write off much of the value of the bonds. This has paved the way for more opportunistic debt investors to pile in on the cheap.
The hedge funds have a higher appetite for risk than the financial institutions offloading the debt and hope to make quick profit if Thames can be stabilised without writing off too large a portion of the senior bonds. Such a rescue would trigger a recovery in the value of the debt and enable Elliott to bank handsome returns.
Elliott is one of the world’s most powerful activist investors, but it was the fund’s 15-year long battle with the Argentine government over outstanding debt payments that cemented its buccaneering reputation.
In an effort to force the country to settle its dues, Elliott seized the Argentine naval ship Libertad as it docked in a Ghanaian port and used it as a bargaining chip to collect on debt that it had acquired at vastly reduced prices. The fund went on to recoup $2.4bn for bonds that it reportedly paid $117m for.
Elliott’s UK assets include the Waterstones chain of bookshops. The company’s London office is managed by Gordon Singer, son of its founder, the billionaire Paul Singer.
Those to have also built up large positions during the reshuffle of Thames creditors also include Apollo Management, another of the world’s biggest players in the distressed debt arena.
Both Elliott and Apollo are part of a so-called steering committee that includes nearly 20 of the most influential lenders with the biggest exposure who will spearhead a restructuring plan.
This collective – billed as an “inner sanctum” by debt traders – also includes New York-based hedge fund DE Shaw, named after founder David E Shaw, a former Columbia University computer science professor. Last year, its two partners shared a £20m payout.
Others on the committee are Anchorage Capital, which netted a near-£2bn profit from betting that Hollywood studio MGM would survive a brush with bankruptcy; Pricoa, which has lent €65m (£55m) to Spanish football club Real Betis; and Sona, a fund that seized control of an Australian wine producer hit by Chinese tariffs earlier this year.
The steering group also includes more mainstream asset managers and insurers such as Blackrock, Invesco, Abrdn, MetLife, and M&G.
One trader said: “Everyone who is anyone in the hedge fund community has been hoovering this stuff up but there are some that will be the kingmakers.”
Together, the senior “class A” bondholders are owed around £10bn. Government analysis drawn up earlier this year estimated that together with banks owed roughly £1.5bn, this group will need to take a “haircut” of 5pc to 10pc in any restructuring. Sources close to the talks think it could be as much as 20pc.
A smaller band of creditors holding “class B” debt of about £1.6bn would probably suffer losses of between 35pc and 40pc, but some debt market experts believe they could be wiped out entirely.
One said: “They’re probably toast.”
A further £1.7bn of debt issued by Thames parent company Kemble is also not expected to be recovered.