I am struggling to come up with an appropriate word to describe this observation from the UK government’s Debt Management Office, and the only one that I can think of is drivel.
There are several reasons for saying so.
First, if any Thames Water debt is taken on by the government, there will be assets to back the value. Otherwise, there would be no reason for taking on the debt.
If there are assets to back the debt then Thames isn’t bust so what’s the justification for nationalisation?
Depends on how you value the assets, I suppose.
As your pipes get leakier they stop being an asset and become a liability.
Surely the point of having the asset is to be able to liquidate it to pay your debt, if necessary.
To whom could the government sell those assets if Thames was to remain nationalised?
And if the assets couldn’t be sold then the debt would be on us taxpayers, n’est pas?
Unless, of course, there’s a nice pile of unused & undervalued land on the books.
Geoffers: When the railways were privatised it was commonly described as a huge landholding with some annoying chunks of metal scattered over it.
It’s bust if the cash-flow is inadequate to service the debt.
Brilliant by James for smoking him out: ‘reducing the money supply is inflationary”. It’s even worse than looking at a graph of inflation from 300 years ago of one of the few currencies still around now and concluding inflation always comes back down, no interest rate intervention, you’ve just got to ride out the shock that caused it. He’s certainly an outstanding intellect, as in one that stands out.
Does TW really have any ‘assets’ in the true meaning of the word? It doesn’t own much land, and what it does own is covered in things like sewage works, which presumably count as contaminated land, so not necessarily very valuable for redevelopment. And probably would be given planning given their strategic importance. All its pipes and sewers are located in other people’s land, so have no intrinsic value in and of themselves. There would be some reservoirs, but again, other than as part of an integrated water treatment and supply business they aren’t that valuable. The only value in the assets of TW is as a whole, as a system to supply clean water to houses and remove and treat sewage. And we all know that the value of this as a going concern is not enough to finance the debts. Ergo it has a net negative value, a quite considerable one.
Probably wouldn’t be given planning……for the love of god get an edit function on this site!
There aren’t assets to back the debt; there is merely the expectation that customers will continue to pay their bills. The debt is implicitly secured against that revenue stream; not against the physical pipes.
The problem is that the revenue is no longer sufficient to service the debt at today’s interest rates. Presumably if the government is considering guaranteeing that debt, it’s because they’re afraid of wider contamination in the fake-private-sector of off-balance-sheet loans, which includes PFI providers, housing associations, train leasing companies, and so on. A debt default by Thames Water would lead to higher debt costs across the fake-private sector, and would undermine government’s ability to deliver goodies for the public.
“Presumably if the government is considering guaranteeing that debt, it’s because they’re afraid of wider contamination in the fake-private-sector of off-balance-sheet loans, which includes PFI providers, housing associations, train leasing companies, and so on. A debt default by Thames Water would lead to higher debt costs across the fake-private sector, and would undermine government’s ability to deliver goodies for the public.”
Ahh, so thats the reason! I was wondering why there was all this fuss about one bust water company and the losses that might fall on the UK University pension fund (plus the teachers of Canada I believe). I was assuming that they’d have to take their losses and everyone moves on. Capitalism eh?
But what you say makes sense – the government would be shitting themselves the whole tottering edifice of debts owed by all these quasi-public bodies would suddenly become a lot more expensive and harder to come by in the future.
If there are assets to back the debt then Thames isn’t bust so what’s the justification for nationalisation?
Well, that’s today’s silly question.
and what it does own is covered in things like sewage works, which presumably count as contaminated land, so not necessarily very valuable for redevelopment.
Ha! The latest estate being built here is on the sewage farm land. I’ve just strolled around it this afternoon and the PONG! is really noticable.
Geoffers, there’s a little bit of info here about how much land Thames Water owns:
https://whoownsengland.org/2016/08/29/liquid-assets-land-owned-by-the-water-utilities/
But as Jim points out, most of it is probably in use or not suitable for other uses.
Thames water’s main asset is a pipe network that is worth billions. It is of course an illiquid asset even though its full of liquid.
Similarly there was a time (possibly still is) when the value of the copper in BT’s phone network was worth much more than the valuation of the company.
Was struggling to wrap my head around this one this morning….
Presumably there’s two entities involved? A “boring” operating co that actually does something and bills for it, regulated to the nth, owned by a holding co leveraged to the hilt, presumably against the revenue stream from the OpCo … and the latter is bust since revenue stream no longer covers payment on those debts?
So why on earth would the taxpayer want to take on that debt?
HoldCo is bust? Ok, administration then. Shareholders take a hit, probably get wiped out, administrator can salvage what value they can for the creditors, . Complicated I imagine if said debt is secured on the HoldCo ownership of OpCo… So perhaps unwinding all that involves effectively the ownership of OpCo moving to the creditors. And?
Meanwhile OpCo carries on as normal
Eventually, administration has sorted who gets what, and creditors collectively own the OpCo, which they eventually sell….
Maybe, just maybe, taxpayer _might_ be a buyer then.
Anything earlier than that is a bailout of somebody.
So where is this simplistic analysis faulty?. Did the OpCo get permission to.take on large debts directly, for the tideway tunnel.perhaps?
It is indeed opco, holdco. Holdco might well be bust. Opco probably isn’t. Except, the regulator is pissing about with allowable prices and investments (they’re allowed to make a set return on assets) but demanding more investment.
@Line Noise – “Presumably there’s two entities involved?”
If I understand correctly the diagram on p. 43 of the latest annual report from Thames Water Utilities Limited (TWUL), TWUL is the regulated utility and owned by Thames Water Utilities Holdings Limited, which is owned by Thames Water Limited, which is owned by Kemble Water Finance Limited. Compaines House reveals lots more companies called “Thames Water…” or “Kemble…” and I don’t know which are related or how. Note that the Thames Tideway tunnel is being built by one of the very many companies called “BAZALGETTE …” which are separate. TWUL accounts mentions “Bazalgette Tunnel Limited” as being responsible.
According to the last accounts (to March 2023) TWUL has assets of 20,479.7 (million pounds), but of that, 18,017.4 are “Property, plant and equipment” which is presumably completely useless as security for a debt as TWUL cannot just sell off a sewage plant or a load of pipes buried in the ground as they are essential to it performing its regulated activities.
The TWUL annual report is a long and tedious 183 pages (freely available from Companies House, of course). Feel free to go through it in detail and follow up all these other companies and their annual reports and let us know what they all mean. I suspect that TWUL has managed to borrow under terms which means it cannot just be sold by TWUHL as a going concern.
Ofwat board have a lot to answer for. They only allow TW customers to be charged about 20% above national average.
Got some land in that area to sell, or a house in that area to sell, possibly you can charge 150% and 100% above national average. Got beer to sell in a pub, possibly 40% above average. Want to buy some labour and you’re paying 30% above average.
When I mentions this to my lefty bro he points out that petrol stations charge about 1-2% above average. Yeah right, the regional costs in selling water and taking schit away are like those of a petrol station, not.
Should never have allowed the price setters to be price payers for that region.
That’s a very, very, fun observation.
“ Similarly there was a time (possibly still is) when the value of the copper in BT’s phone network was worth much more than the valuation of the company.”
A lot of that copper is fast becoming redundant but difficult to get at. You can’t recover, say, 30 pairs of a 50 pair cable without some very expensive replacement costs, but a lot of the trunk cables have been fully replaced by fibre. The last mile is also going to be very difficult to recover.
BT also has some very empty building in expensive areas since they ripped out all the manual exchanges and replaced them with ever smaller digital switches. The problem is that all the cables and fibre still terminate in these buildings and rerouting them will be very expensive.
BT has also been described as a pension fund with a telecoms business.
“If I understand correctly the diagram on p. 43 of the latest annual report from Thames Water Utilities Limited (TWUL), TWUL is the regulated utility and owned by Thames Water Utilities Holdings Limited, which is owned by Thames Water Limited, which is owned by Kemble Water Finance Limited. Compaines House reveals lots more companies called “Thames Water…” or “Kemble…” and I don’t know which are related or how. Note that the Thames Tideway tunnel is being built by one of the very many companies called “BAZALGETTE …” which are separate. TWUL accounts mentions “Bazalgette Tunnel Limited” as being responsible.”
More grist to my mill that limited companies are just used for financial shenanigans that have no value to wider society at all. There’s no reason why all of TW’s activities couldn’t be done through one company. Any people lending it money could just as easily lend it to that entity rather than god knows how many shell companies each inside the other. All of that is just smoke and mirrors.
Bongo said:
“When I mentions this to my lefty bro he points out that petrol stations [in the South East] charge about 1-2% above average.”
Gross margins on petrol (what the petrol station gets, to pay their costs, staff, etc. out of) are, what, about 7%? The rest being tax and the actual fuel cost, none of which is affected by location. So 1-2% extra on the pump price is effectively an extra 15-30% on the bit of the charge used to run the actual petrol station, i.e. the location-dependent part.
Jim, better for us in this case to have the financial structure because, as Line Noise points out, we can let all the financial holding company bit go bust, while the bit we need – the operating company that actually supplies us with water – carries on doing so.
(If our government wasn’t spending our money protecting someone else, of course)