Briefing: Thames Water and the Shadow of Special Administration

Two years ago, in July 2023, Thames Water’s then interim CEO Cathryn Ross told MPs that special administration was a “very much a nuclear option” for the ailing utility and that the government was “a long way off” pulling the plug. Ross’ comments came after Thames’ previous Chairman and CEO had unexpectedly resigned. The group has been “living in crisis mode” ever since, current Chairman Adrian Montague said earlier this week.

Two years on, Thames has secured financing of up to £3 billion from senior creditors via an interim restructuring plan that was upheld on appeal. However, a planned equity raise run by Rothschild collapsed when KKR, the preferred bidder, unexpectedly pulled out on June 3. The prospect of a special administration seems closer than ever.

Thames’s senior Class A creditors who hold around £13 billion of debt had been working on a fallback plan involving the provision of £3 billion of fresh equity and £2 billion of debt as well as a substantial haircut to the Class A and B notes as part of an intended second comprehensive restructuring plan. As one MP on the select committee said, the Class A plan is now “the only show in town.” Management also conceded that the Class A creditors have a great deal of “contractual control” over the process. But there is conditionality to their proposal, most notably a regulatory reset with Ofwat regarding around £1 billion in fines and levies that the group expects to pay between now and 2030. If the creditors cannot reach an agreement with Ofwat and the government this month, the group risks collapsing into a special administration.

Grilled by MPs at a select committee hearing earlier this week, management denied they are “holding a gun” to the government and taxpayers’ head. The request by Class A creditors merely “reflects the reality of the situation,” Montague said.

In the House of Commons on June 19, Steve Reed MP, the Secretary of State for Environment, Food and Rural Affairs, appeared to scotch any notion that the government would agree to any regulatory easements: “It is only right that [Thames] is subject to the same consequences as any other water company.” He also said the government had stepped up its preparations for a special administration.

On Tuesday, July 15, Thames creditors gave consent to amend the terms of the first £1.5 billion tranche of super senior new money and release funds sufficient to meet the liquidity needs of the company until the end of August. To date, Thames has drawn about half of the first £1.5 billion tranche of new money.

Thames is already shaping up to be Britain’s largest ever corporate restructuring regardless of whether the second restructuring plan happens inside or outside a special administration.

“We are trying to refinance this company and preserve it from special administration, which would be very bad for everybody,” Montague told MPs. “There’s a feeling in some quarters that special administration is sort of a silver bullet that wipes everything clean,” he added.

The Updated SAR Regime

There are two principal triggers for a special administration as set out in section 24(2) of the Water Industry Act 1991 – an insolvency trigger, and a performance trigger.

An application to the High Court can be made by Ofwat or the U.K. Secretary of State on the following grounds:
 

• That the company is or is likely to be unable to pay its debts; and/ or
• That there has been, is or is likely to be a breach by the company of any condition of its water license which is “serious enough to make it inappropriate for the company to continue to hold its appointment.”

Prior to an update of the special administration rules last year (summarized for bondholders HERE), the sole objective of a SAR was to ensure the continued provision of water and sewage services to customers and meet its environmental obligations and the only way to do that was via a transfer of the regulated business to a new owner via a transfer scheme.

However, The Flood and Water Management Act 2010 (Commencement No. 10) Order 2024, The Water Industry Act 1991 (Amendment) Order 2024 and The Water Industry (Special Administration) Rules 2024, brought into force provisions envisaged by Schedule 5 of The Flood and Water Management Act 2010 that had laid dormant on the statue book. The Water (Special Measures) Act 2025 made further changes to the regime. As a result special administrators to a water company now have the following options to choose from depending on the ground relied on:

Insolvency Trigger	Performance Trigger
Rescue Purpose: The new purpose of rescuing the company as a going concern via a debt restructuring applies only where there is an insolvency trigger. Gives special administrators the ability to propose a company voluntary arrangement, scheme of arrangement or restructuring plan unless they think a transfer to a new owner would secure more effective performance of the company’s	Hive Down: Permits a sale of the regulated company via hive-down, that is transferring all or part of the company’s to a wholly-owned subsidiary of the company then transferring securities in the subsidiary to another company.  A hive-down is a tax efficient way of selling a company. It was used in the special [energy] administration of Bulb Energy to sell select assets to Octopus Energy in 2022.

The amended regime also modifies the usual insolvency rule in a number of ways. Regarding secured creditors, with the court’s permission, the special administrators have the right to dispose of property subject to a fixed charge as if it were not so. The safeguard required for court approval is that the disposal of the secured property would likely promote the purpose of the special administration. If so, a secured creditor is entitled to proceeds arising from “the best price which is reasonably available on a sale which is consistent with the purposes of the Special Administration” rather than the best available open market price as in a typical administration.

Other changes include:
 

• An express prohibition on special administrators disposing of Protected Land without the consent of the Secretary of State;
• Granting the Department of Environment, Food and Rural Affairs and regulator Ofwat enhanced oversight where company voluntary arrangements, schemes of arrangement or restructuring plans (as applicable) are used;
• Shareholders, creditors, Ofwat or the Secretary of State may challenge the conduct of a special administrator on the basis that they are “conducting the special administration in a way that is preventing its purposes from being achieved as quickly and efficiently as is reasonably practicable” or contrary to the Water Licence. However, the court cannot uphold a challenge unless the Secretary of State and Ofwat have been given a reasonable opportunity to make representations or it would impede the objectives of the special administration.
• Ensure HM government and Ofwat are notified ahead of any winding-up petition filed by a creditor.
• Powers to block executive bonuses for poor environmental performance.

Costs of a SAR: £3.5B or More?

During a special administration, the U.K. Secretary of State has the power (under section 153 of the Water Industry Act 1991), with the consent of HM Treasury, to directly fund the company and grant indemnities to cover liability and loss giving the SAR the character of a quasi nationalization.

This was modified to give priority to the right of repayment to the government ahead of all creditors and even the special administrators in order to protect the interest of tax payers.

In the event of a shortfall, section 14 of the Water (Special Measures) Act 2025 which came into force in June, gives new powers for the Secretary of State to modify water company licences to recover any shortfall that it does not expect to otherwise recover from a sale or rescue of a company in special administration.

The shortfall recovery mechanism means that ministers would have the power to decide the fairest and most appropriate way to allocate costs if they chose to do so.

Asked how much a special administration would cost the government, Montague told MPs that it could cost more than the £3.5 billion that was submitted in evidence as part of the first restructuring plan depending on how long the SAR process took to complete but that the overall cost to the state would likely be zero.

For reference, Bulb Energy’s special administration costs around £3 billion, mostly due to the fact that HM Treasury was unable to enter into hedging contracts, all of which was repaid. In fact, the government made a profit of £1.5 billion according to Octopus Energy.

However, Montague explained that SAR is not a silver bullet and that much of the work that it is presently doing is to refinance the company and cut its debt would have to be repeated in a SAR.

“If they [the special administrators] aspire to sell Thames Water to another bidder they find, then we have to go through the same process of due diligence, same process of environmental risk assessment, same process of sorting out the creditors […] All the problems that we’re dealing with now will have to be dealt with again in the context of a special administration,” Montague said.

Possible Appeal to the Supreme Court on SAR Public Interest Grounds

SAR was the relevant alternative to the group’s first restructuring plan and would likely also be for a second restructuring plan. It is also the basis of an appeal brought by Charlie Maynard MP against the Court of Appeal’s decision to uphold the interim restructuring plan. Maynard’s application for permission to appeal to the has not yet been accepted or refused by the Supreme Court.

The issue is whether a restructuring plan which satisfied all the jurisdictional requirements of Part 26A of the Companies Act 2006 should nevertheless have been declined sanction by the court on the basis that the public interest would be better served by the entry of Thames Water Utilities Ltd. into a special administration regime, notwithstanding that this view was not shared by the Secretary of State or OfWat.

Ofwat provided two letters to the Court in January and February 2025. Ofwat wrote that Thames’ directors were in the best position to make a decision about its solvency, and that it did not consider it was required to, or that it was appropriate to, take action to prevent a private sector restructuring in the circumstances.

Maynard objected to the plan on the basis that it was not in the public interest because it would load an unwarranted further debt burden onto Thames. He argued that the customers of Thames Water and the wider public would be better served by a special administration as the costs associated with a SAR would be lower than the costs of the plan.

In its judgment upholding the restructuring plan, the Court of Appeal clarified that the court’s involvement, when weighing its discretion to sanction a plan “is limited to considerations of fairness as between creditors.”

In the appeal judgment, the court disavowed a responsibility to conduct a wider enquiry as to whether the plan or a special administration would better serve the public interest. “The [Secretary of State] and Ofwat are the guardians of the public interest so far as water and sewerage undertakings are concerned,” the judges wrote, and it is not for the court to “usurp” their functions.