Government has changed the rules around the special administration regime (SAR) for water companies that change how a company can be structured in the event of liquidation.
A company that cannot pay its debt could now have all or part of its business transferred to a wholly-owned subsidiary of the parent company. The previous process only allowed for a direct sale of assets, however now securities can be transferred to another company.
Restructuring lawyer Kate Stephenson at Kirkland and Ellis, said this step was intended to maximise value – and thus attractiveness to buyers – at the point of potential sale by ringfencing value and enabling potential tax savings.
This is the first time the liquidation process has been updated since privatisation in 1989 by the Department of environment, food and rural affairs (Defra).
Under the new rules, administrators can impose a restructuring for the struggling water to continue operating if they think it is otherwise stable enough to meet its obligations and continue operating.
This would allow a company to restructure its debts within the SAR process and exit the special administration as a going concern.
This rescue purpose Stephenson said only applies where the special administration was based on insolvency grounds, if it were to happen because of poor performance, this option would not apply.
The changes bring the SAR process in line with administration regimes in other sectors.
In July 2023, concerns about the financial resilience of Thames Water were raised, but the company was deemed to have sufficient headroom to avoid entering SAR process.
At the end of the year, chief financial officer Al Cochran warned that Thames’ parent company did not have funds to repay debts of £1.35 billion maturing from April 2024 to 2028, with £190 million due in the spring.
Southern Water was understood to have come close to the process following record fines issued by both the Environment Agency and Ofwat. When new owners Macquarie bought a majority stake new equity was injected into the organisation to bolster its financial resilience.
Public and political concerns over the resilience of water companies have grown in recent years with calls for the industry to be renationalised. It is anticipated to be a hot topic in the upcoming general election.
Ofwat has introduced licence conditions for all water companies to ensure they have sufficient financial headroom to operate and react if necessary to unexpected added expenses.
Dividend payments could be blocked by the regulator if a company does not meet Ofwat’s threshold.