Water giants sitting on a £65 billion debt timebomb

Britain’s water companies are sitting on a time bomb in debt – with more than half of the industry’s £65bn linked to inflation, data shows.

Most of these loans would have been taken out when interest rates were low, but they have since soared, wreaking havoc on corporate balance sheets.

The interest payments cost billions of pounds that would be better spent on cleaning up polluted rivers or repairing leaky pipes.

Some companies are already in talks with lenders to strengthen their finances, including Wessex Water, which has renegotiated loan agreements in the face of rising inflation.

The size of inflation-related borrowing varies. The data, from credit rating research group S&P Global, revealed that more than 60 percent of Anglian Water’s £6.8 billion debt is linked to inflation, while in Severn Trent’s case it’s less than 30 percent.

Professor Richard Murphy, from Sheffield University Management School, said: ‘The crisis facing the water industry in both England and Wales is easy to understand given the amount of their debt that has been indexed.

“The cost of index-linked debt skyrockets with inflation. In 2023, the additional costs could easily amount to many hundreds of millions of euros.

‘This factor in itself explains why water companies are in such deep trouble, even before the costs of addressing their pollution impacts on the rivers and beaches of England and Wales are taken into account.’

He added: “The gamble they took that inflation would remain low has backfired on them.” In isolation, regulatory changes could lead to an investor exodus from the industry in the coming years.

Regulator Ofwat comes with new rules that try to curb lucrative dividend payments. Pietro Nicholls, portfolio manager at RM Funds, a former investor in Thames Water who sold his stake in May, said this could trigger a cascade of crises in the sector if shareholders pull out en masse.

The water industry has once again been thrust into the spotlight after it emerged last week that Thames Water, Britain’s largest supplier with 15 million customers in London and the South East, was on the brink of collapse.

The unexpected departure of CEO Sarah Bentley last week led to emergency talks with Whitehall. The government has drawn up contingency plans for a possible taxpayer bailout and Ofwat has issued a clear warning that the company has to deal with ‘significant’ problems.

MPs and campaigners warned against bailing out with public funds.

Thames Water’s most pressing problem is its £14 billion mountain of debt, which it has accumulated despite the company paying huge dividends to shareholders.

This includes large sums to the China Investment Corporation, an arm of the Beijing government that holds an 8.7 percent stake in the company. Thames Water’s rush to raise money has sparked fears about the health of other water companies, which are also heavily indebted.

United Utilities and Severn Trent, both listed on the London Stock Exchange, have £8.2 billion and £7.16 billion in loans respectively.

Ofwat was contacted for comment last night.