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Judge slams Ofwat and government for not attending Thames Water hearing

Court will decide whether to approve emergency £3bn loan for UK’s biggest water utility

A high court judge who will decide whether to approve a £3bn bailout of troubled utility Thames Water has criticised the British government and water regulator for failing to engage in the process.

Mr Justice Leech, who is presiding over the week-long hearing on whether to approve an emergency loan from Thames Water’s senior lenders, said that the lack of engagement in proceedings from water regulator Ofwat and the government was “unfortunate”.

“It would have been nice, I think, if either Ofwat or the secretary of state had felt the need to turn up and explain the position to the court”, Leech said.

He later added that the lack of government testimony on the costs of a temporary renationalisation had also placed the court in a “very difficult position”.

The hearing comes at an existential moment for Thames Water, the UK’s biggest water company, which is struggling under its £19bn debt mountain. If the court does not approve the emergency loan, the judge has acknowledged that the utility will “inevitably” fall into the special administration regime, a form of temporary renationalisation.

Thames Water told the court that, absent a deal, it will run out of cash on March 24 — triggering the first temporary renationalisation of a water company since utilities in England and Wales were privatised in 1989.

At the High Court proceedings this week, rival creditors went to war over the future of the struggling utility, which supplies almost a quarter of the UK with water and sewerage services. Thames Water’s lower-ranking lenders are trying to challenge the plan for the emergency loan and force the utility to accept their own cheaper £3bn loan.

There is a parallel effort to raise billions of pounds in new equity to fix Thames Water’s balance sheet, overseen by Rothschild & Co.

Rothschild initially approached more than 50 potential investors such as infrastructure funds and private equity firms, according to a letter submitted to the court and which was obtained by the Financial Times.

It does not state how many submitted non-binding proposals by the last deadline in December.

The letter also noted that one bidder had “made some criticisms of the process”, adding that this bidder also holds lower-ranking class B debt. Thames Water’s barrister Tom Smith KC said this was probably Covalis Capital, which was revealed in court to have backstopped part of the junior bondholders’ rival £3bn loan plan.

Covalis said it “cannot conclude whether it is possible to deliver a binding bid by the end of April 2025” unless it has more access to information and engagement with the utility’s management, according to a separate letter sent by Covalis to Judge Leech on Thursday. Neither the chair or chief executive had attended the most recent briefing to equity providers on January 28, the letter said.

The class A creditors, which include US hedge funds Elliott Management and Silver Point, are preparing a “creditor bid” for the utility in the event the Rothschild process does not succeed, the court also heard.

While the next round of bids is due on Monday, Leech is not expected to make a ruling on the loan until the end of next week at the earliest, and there is potential for an appeal.

“The government is closely monitoring the situation, and it would be inappropriate for the secretary of state to comment further on ongoing legal proceedings or private company financial matters,” the Department for Environment, Food & Rural Affairs said.

Ofwat declined to comment.

The absence of Ofwat and the government left the public interest case to be made by Charlie Maynard, a Liberal Democrat MP, whose barrister argued that only a third of the emergency loan’s proceeds would reach the utility after interest payments and other costs. Under cross-examination, Thames Water’s chief financial officer conceded its total bill on restructuring lawyers and advisers could also climb to £200mn.

“It shouldn’t have taken a pro bono intervention by a junior to cross-examine the CFO for those sorts of costs to come out,” William Day, Maynard’s barrister, said in his closing argument.

Thames Water declined to comment.

Activist investor Bill Ackman has taken a stake of more than $2.3bn in the ride-share company Uber, snapping up shares that he said were priced at a “massive discount”.

Ackman announced the new stake after Uber posted weaker than expected fourth-quarter earnings this week, but heralded what it claimed was a more than “$1tn-plus opportunity” that autonomous vehicles could revolutionise rather than disrupt its business.

On Friday, the company’s stock closed 6.6 per cent higher, giving the group a market capitalisation of almost $160bn.

“We believe that Uber is one of the best managed and highest quality businesses in the world,” Ackman, who runs hedge fund Pershing Square Capital Management, wrote on Friday on X.

“Remarkably, it can still be purchased at a massive discount to its intrinsic value. This favourable combination of attributes is extremely rare, particularly for a large cap company.”

Pershing Square and Uber did not immediately respond to requests for comment.

While Ackman said in the post on X that Uber had “suffered from erratic management” over the years, he praised chief executive Dara Khosrowshahi for finally making the group profitable.

Khosrowshahi replaced Uber co-founder Travis Kalanick in 2017 after he became ensnared in a string of scandals, including allegations that he led an organisation that turned a blind eye to workplace sexual harassment.

Ackman said that his hedge fund began buying up Uber’s stock in early January and that the group now owned more than 30mn shares. He made his first investment in the company around its founding in 2009, with a small stake facilitated through a venture capital fund.

Uber reported its first annual operating profit last February, a turning point for the Silicon Valley company.

It had a difficult period around its initial public offering in 2019, which failed to meet expectations of a $120bn value. When it did list, Uber’s debut was the worst first-day dollar loss for a US company going public.

Last February, Khosrowshahi said the results were “an inflection point for Uber, proving that we can continue to generate strong profitable growth at scale”.

The company reported annual profitability again last year, and aims to integrate autonomous vehicles into its fleet. It signed a deal with Alphabet subsidiary Waymo last year, and this week opened a waiting list for its self-driving vehicles in Austin, Texas. 

In January of 2001, not yet a full week into the presidency of George W Bush, Alan Greenspan appeared before the Budget Committee of the US Senate. This was not part of the semi-annual event where the chair of the board of governors of the Federal Reserve reports to Congress on monetary policy. Rather, he was an expert, there to help with a problem. In 2001, the US was in danger of paying down its debt completely and accumulating a surplus. 

Greenspan was not in favour of a surplus. It would have to be invested in private financial assets, he pointed out, distorting capital markets and making it “exceptionally difficult to insulate the government’s investment decisions from political pressures”. Greenspan was explicitly against a sovereign wealth fund, but he needn’t have worried. Over the next two-and-a-half decades the federal government paid for tax cuts, a war, more tax cuts, another war, a stimulus, more tax cuts, another stimulus, and is now once again contemplating tax cuts. 

When Greenspan spoke, federal debt was 55 per cent of GDP and headed down. It’s now at 120 per cent, headed up. But all other things are not equal, and this month, the US president directed his Treasury and commerce departments to develop a plan for a sovereign wealth fund. There is no wealth but there is a sovereign, and by God he will have his fund. 

If we define them broadly, there already are sovereign wealth funds in the US. Public pension and retirement funds buy private assets to guarantee a return. The fund for federal employees, for example, held $845bn in assets as of its most recent report. The fund for California’s public employees, the next largest, holds $597bn. America’s states, too, hold rainy-day funds. Wyoming could survive for more than eight months on its fund alone. 

These funds are all hemmed in with boards and oversight and demands for regular, predictable payouts. They lack the one thing that makes a sovereign wealth fund so much fun: discretion. 

Here the White House can look abroad for a model. Since 1996, Norway’s central bank has run a fund that converts oil revenue into financial assets, providing a 6.3 per cent annual return and a significant contribution to the country’s annual budget. The fund buys mostly foreign equities and debt but has some discretion to invest in real estate and renewable energy projects. Saudi Arabia’s Public Investment Fund makes splashy buys abroad.

The original goal of both of those funds, however, was to manage exactly what Greenspan was worried about in 2001. Both countries, looking at growing pools of oil wealth, wanted to keep their surpluses offshore, where they couldn’t distort the domestic economy. But as Greenspan pointed out, any investment fund to dispense with state wealth runs the risk of becoming a way for the sovereign to dispense favours. Norway’s fund has goals beyond profit, but restrains them with impeccable transparency. Saudi Arabia’s fund has social goals, too, with fewer restraints and less sunlight.

There is no onshore American surplus, however, to move offshore before it does any damage. The White House’s fact sheet for the executive order declares that the US already holds $5.7tn in assets, a true number that is useful only if we are wilfully blind to the actual balance sheet of the actual US. Of that $5.7tn, only $1.2tn is in cash or gold. The rest is illiquid — inventory, property, plant, and $1.7tn in loans receivable (money owed to the government).

It’s far more likely that the US is going to do what it’s always done. It will sell treasuries into financial markets to raise cash to spend on its priorities. What the White House is actually proposing, then, is a development fund, something like Ireland’s Strategic Investment Fund. On the liability side of America’s investment bank, there would be treasury obligations. On the asset side, whatever assets the White House fancies. That’s not a sovereign wealth fund, and it’s not even really a development fund. It’s just what America already does. 

There’s a different way to look back at what’s happened since Greenspan’s testimony. The US hit a gusher: not oil, but treasuries. It sold them at will, at volumes and borrowing costs that did not obey any predictive laws of finance. The proceeds went straight back into the domestic economy, directed by Congress as a governing board. Congress invested in tax cuts that stimulated financial markets, in contracts that stimulated defence firms, and in stimulus cheques after a financial crisis and a pandemic. 

America already is a sovereign wealth fund. What came out of it is what America is today. 

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