Steady revenue. Little controversy. And institutional investors tripping over themselves to be involved. Water was supposed to be a boring business. Yet Macquarie Group’s decade as owner of Thames Water was anything but.
Interviews with several people familiar with the company and its regulator, Ofwat, during the period of Macquarie’s ownership paint a picture of an adroit financial operator. One that was helped by a flawed Ofwat-managed pricing system, which encouraged water companies to take on ever greater levels of debt. That indebtedness has left parts of the industry struggling to survive.
Yet that debt—at a time of higher interest rates—has crippled Thames and its parent company Thames Water Kemble Finance Plc, which Macquarie helped create before the 2006 purchase. In April Kemble told investors it would default on its debts, and its bonds due in 2026 are now virtually worthless. That hunt for new backers was made more difficult when one of the two investors who bought stakes in Thames from Macquarie in 2017—the Ontario Municipal Employees Retirement System—wrote off the entire value of its £990 million stake in Kemble. Other investors are expected to lose equally heavily.
Part mathematical formula, part academic exercise, the WACC can only ever be an educated guess. But it has taken on totemic importance in an industry strapped for cash. In effect, the companies, all monopolies, are given permission by the regulator to make a certain level of return, but the process is more akin to a thought experiment than a functioning market price.
“When the great financial crisis happened and interest rates went to the floor, Ofwat never revised what the cost of capital was,” said Tim Whittaker, a research director at the EDHEC Infrastructure Institute. “For years, Macquarie got away with just gearing up the balance sheet adding as much debt as it could, and it allowed them to rip that cash out essentially without the investment in the business itself.
Officials speaking on condition of anonymity said that until 2021 they had to rely on coercion and embarrassment to achieve reductions in leverage. But in April 2023, Ofwat announced that poorly performing companies wouldn’t be allowed to pay dividends. Just seven months later, Thames paid Kemble £37.5 million to service its debt and Ofwat started the investigation that ultimately led to its shareholders cutting the company off from new equity.
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