Published Tuesday, February 25, 2025
The English court has sanctioned Thames Water's interim financing plan, but an appeal by the opposing creditor group will be heard on an expedited basis.
The past year has been turbulent for Thames Water. After the court declined to convene creditor meetings for the alternative Class B restructuring plan, the company's proposed interim financing now faces a critical juncture. The Court of Appeal is set to hear the Class B creditors’ appeal in the coming weeks, presenting two possible outcomes: either the appeal fails, allowing the company to proceed with its equity-raising timeline and propose a second recapitalization restructuring plan (RP2) by next September, or the appeal succeeds, leaving insufficient time to secure interim financing and potentially forcing the company into special administration before the end of March.
Key Takeaways
Mr. Justice Leech’s decision to sanction the company’s plan was based on several findings:
- Class B Alternative Plan:
The court deemed this plan undeliverable within the company’s narrow liquidity window. It lacked critical support from Class A creditors and raised doubts about whether its new money commitments were binding and fully underwritten. The court also rejected Class B creditors’ argument that Class A creditors would support their alternative plan to avoid special administration, finding it more likely that Class A creditors would pursue their own strategy.
- Relevant Alternative:
Since the Class B Alternative Plan was deemed unworkable, the court agreed with the company and Class A creditors that special administration was the correct relevant alternative—not the Class B Alternative Plan.
- No Worse Off:
The court preferred the company's valuation evidence, concluding that Class B creditors would not be worse off under the company’s plan compared to special administration, where they would have no economic interest.
- Horizontal Comparison:
As out-of-the-money creditors, Class B creditors could not rely on this test, which assesses fairness between creditor classes based on restructuring surplus distribution. The judge adhered to established precedent that little weight should be given to opposition from out-of-the-money creditors. Notably, Class B creditors were offered proportionate participation rights in super senior financing alongside Class A creditors.
- Class A Creditor “Control Rights”:
The plan made access to part of the super senior financing contingent on meeting specific milestones in the equity-raising process, including securing substantial support from super senior and Class A creditors for a recapitalization plan by June 30, 2025. The court dismissed claims by Class B creditors that these provisions unfairly diverted value or violated competition law, instead finding them reasonable protections for in-the-money creditors.
- Third-Party Releases:
The plan included releases for directors, officers, advisers, and other group companies related to interim financing transactions. While broad in scope, these releases were deemed permissible as they were limited to interim financing and did not extend to general management or affairs of the company. Future releases under RP2 would be subject to separate consideration by creditors and the court.
Expedited Appeal Grounds
In sanctioning the plan, Mr. Justice Leech emphasized giving Thames Water a chance to finalize RP2. However, this opportunity is constrained by an expedited appeal process set to conclude before March 24—when the company expects its liquidity will run out. The appeal is limited to three key grounds:
1. Valuation Evidence:
Class B creditors argue they would fare better under their alternative plan or special administration than under the company’s plan. Their valuation evidence suggests full recovery in all scenarios.
2. Fairness of Control Rights:
They contend that their exclusion from control rights disproportionately favors Class A creditors and unfairly impacts equity-raising oversight.
3. Third-Party Releases: They challenge these releases as unnecessary for implementing interim financing alone.
Water Under the Bridge?
The dismissal of Class B creditors’ application to convene meetings for their alternative plan underscores judicial skepticism toward such tactics when plans lack viability or creditor support.
It is unsurprising that contractually senior creditors (Class A holding approximately £16 billion of debt) wield greater influence than subordinated creditors (Class B holding approximately £1 billion of debt), especially when:
- The court found Class B debt clearly underwater (partially based on trading discounts); and
- No restructuring can proceed without substantial support from Class A creditors.
The court also warned that any successful cram-up of dissenting Class A creditors under a future alternative plan would face significant hurdles for approval.
Looking ahead, while RP2 may provide an opportunity for courts to revisit fairness issues concerning restructuring surplus distribution between in-the-money and out-of-the-money creditor classes, this case appears ill-suited for such scrutiny given its circumstances.
Conclusion
For prospective equity investors observing this process—marked by three competing restructuring plans and significant costs—the urgency of RP2 cannot be overstated if Thames Water is to achieve long-term stability. Assuming the appeal is dismissed, attention will shift swiftly toward finalizing RP2 as a comprehensive solution for recapitalizing Thames Water’s balance sheet.
