Water giants sitting on a £65 billion debt timebomb

Shock exit: Sarah Bentley

Britain’s water companies are sitting on a debt timebomb – with more than half of the industry’s £65 billion mountain linked to inflation, data shows.

Most of these loans would have been taken out when the rate was low, but it has since soared, wreaking havoc on company balance sheets.

Interest payments eat up billions of pounds that could be better spent cleaning up polluted rivers or fixing leaky pipes.

Some firms are already in talks with lenders to shore up their finances, including Wessex Water which has renegotiated loan arrangements in light of spiralling inflation.

The extent of inflation-linked borrowing varies. The data, from credit rating research group S&P Global, revealed more than 60 per cent of Anglian Water’s £6.8 billion debt is pegged to inflation, whereas in the case of Severn Trent it is less than 30 per cent.

Professor Richard Murphy, of 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 is index-linked.

‘The cost of index-linked debt skyrockets with inflation. In 2023 the extra cost could easily amount to many hundreds of millions of pounds.

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

He added: ‘The gamble they took that inflation would stay low has backfired badly on them.’ Separately, changes to regulation in the coming years could spark an exodus of investors from the sector.

Regulator Ofwat is bringing in new rules that seek to curb lucrative dividend payments. Pietro Nicholls, portfolio manager at RM Funds, a former investor in Thames Water that sold its stake in May, said this could trigger a cascade of crises in the industry if shareholders pull out en masse. 

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

The unexpected departure of its chief executive Sarah Bentley last week triggered emergency talks with Whitehall. The Government has drawn up emergency plans for a potential taxpayer bailout and Ofwat has issued a stark warning that the company has ‘significant’ issues to address.

MPs and campaigners warned against rescuing it with public funds.

Thames Water’s most pressing problem is its £14 billion debt pile, which it has built up despite the firm handing huge dividends to shareholders.

This includes large sums to the China Investment Corporation, an arm of the Beijing Government which has an 8.7 per cent stake in the company. Thames Water’s rush to raise cash sparked fears about the health of other water firms, which are also highly indebted.

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

Ofwat was contacted for comment last night.