Pants on Fire!

[DrPhill]

I’m liking this discussion now we have left the political wrestling behind.

I’m having a little difficulty with the terminology though. Could someone provide a glossary and/or some diagrams (or links to the ‘for dummies’ version’) please?

 

[Jake]

This is the structure (courtesy of the FT, hopefully they don't mind with the credit).

The opcos (operating companies, the actual water business) are the three companies inside the bottom right box. They have loads of debt which is secured against all the operating assets (technically against their value rather than the assets themselves as there is a statutory restriction on securing the regulated assets, but it amounts to much the same thing - but some of the details there are in non-public* documents).

The part of the group which is in trouble is higher up in the group structure (the lines denoting ownership by shareholding). Thames Water Limited is the first layer of topco along with the other companies with Kemble in their names.

All the returns earned in the group come from the opcos who run the water business. Everything above them just receives income flows from them in the form of dividends flowing upwards through the structure. As you can see, the two topcos in the lefthand upper dotted box have taken out a load of debt (by selling notes or bonds) - the idea being that they use their dividends to pay the interest on that debt, and take the surplus as profit. But they've stretched themselves too thin and unless they can raise more capital from shareholders, the whole topco edifice is going into administration (which I imagine would take the regulated businesses into a special administration). But, that would also automatically trigger acceleration rights for the lenders to the opcos (acceleration means a right to demand immediate repayment of the principal which has been lent as well as interest). That would put those noteholders in control of realising the value of the opcos. The obvious way to do is to sell to a new topco - either a captive created by the lenders themselves or one created by some other private equity fund. The real problem is that the opcos are the valuable part of the business, and the opco lenders have taken security over them so they have control of a business which fundamentally is still very valuable, it is just its owners who have a problem because they took on too much debt.

Happy to explain more terms but not sure which would be helpful.

*Another thing which should not be permitted with a state regulated natural monopoly even if the privatisation is accepted.

 

[Jacob]

I’m liking this discussion now we have left the political wrestling behind.

I’m having a little difficulty with the terminology though. Could someone provide a glossary and/or some diagrams (or links to the ‘for dummies’ version’) please?

I've just ordered the Gary Stevenson book for a few answers. Basic economics text books don't seem to cover the dodgy details of the world of finance.
https://en.wikipedia.org/wiki/Gary_Stevenson_(economist)
https://www.google.com/search?q=eco...PugYECAEYCJIHAzIuMqAHijI&sclient=gws-wiz-serp

 

[DrPhill]

I've just ordered the Gary Stevenson book for a few answers. Basic economics text books don't seem to cover the dodgy details of the world of finance.
https://en.wikipedia.org/wiki/Gary_Stevenson_(economist)
https://www.google.com/search?q=economics+for+dummies+uk&sca_esv=75d2da38486ca9c2&sxsrf=AHTn8zptb3ewoOkRQyews5EyevqdJSK8lw:1738058153209&ei=qamYZ8ylDOOO9u8PxIvWwAY&ved=0ahUKEwiMnsiWk5iLAxVjh_0HHcSFFWgQ4dUDCBA&uact=5&oq=economics+for+dummies+uk&gs_lp=Egxnd3Mtd2l6LXNlcnAiGGVjb25vbWljcyBmb3IgZHVtbWllcyB1azIFECEYoAEyBRAhGKABMgUQIRigATIFECEYnwUyBRAhGJ8FMgUQIRifBTIFECEYnwUyBRAhGJ8FSNQXUN8FWIENcAF4AJABAJgBfqABvwOqAQMxLjO4AQPIAQD4AQGYAgSgAuACwgIKEAAYsAMY1gQYR8ICDRAAGIAEGLADGEMYigXCAhMQLhiABBiwAxhDGMgDGIoF2AEBwgIWEC4YgAQYsAMYQxjUAhjIAxiKBdgBAcICChAAGIAEGEMYigXCAgUQABiABMICBRAuGIAEmAMAiAYBkAYPugYECAEYCJIHAzIuMqAHijI&sclient=gws-wiz-serp

Let me know if it is worth a read to clear up my knowledge of this murky world - in the case of the TW it sounds to me like legal theft of national taxes using a privatised essential monopoly.

 

[Jacob]

Let me know if it is worth a read to clear up my knowledge of this murky world - in the case of the TW it sounds to me like legal theft of national taxes using a privatised essential monopoly.

Rightho! Doesn't arrive til Feb 8th - pre order of new edition apparently

 

[Blackswanwood]

This is the structure (courtesy of the FT, hopefully they don't mind with the credit).

The opcos (operating companies, the actual water business) are the three companies inside the bottom right box. They have loads of debt which is secured against all the operating assets (technically against their value rather than the assets themselves as there is a statutory restriction on securing the regulated assets, but it amounts to much the same thing - but some of the details there are in non-public* documents).

The part of the group which is in trouble is higher up in the group structure (the lines denoting ownership by shareholding). Thames Water Limited is the first layer of topco along with the other companies with Kemble in their names.

All the returns earned in the group come from the opcos who run the water business. Everything above them just receives income flows from them in the form of dividends flowing upwards through the structure. As you can see, the two topcos in the lefthand upper dotted box have taken out a load of debt (by selling notes or bonds) - the idea being that they use their dividends to pay the interest on that debt, and take the surplus as profit. But they've stretched themselves too thin and unless they can raise more capital from shareholders, the whole topco edifice is going into administration (which I imagine would take the regulated businesses into a special administration). But, that would also automatically trigger acceleration rights for the lenders to the opcos (acceleration means a right to demand immediate repayment of the principal which has been lent as well as interest). That would put those noteholders in control of realising the value of the opcos. The obvious way to do is to sell to a new topco - either a captive created by the lenders themselves or one created by some other private equity fund. The real problem is that the opcos are the valuable part of the business, and the opco lenders have taken security over them so they have control of a business which fundamentally is still very valuable, it is just its owners who have a problem because they took on too much debt.

Happy to explain more terms but not sure which would be helpful.

*Another thing which should not be permitted with a state regulated natural monopoly even if the privatisation is accepted.

I’d like one of the “topco” directors to be called in front of a Treasury Committee to explain what the legitimate purpose of that structure is.

 

[Jake]

I’d like one of the “topco” directors to be called in front of a Treasury Committee to explain what the legitimate purpose of that structure is.

It was intended to maximise value for shareholders, which is a legitimate aim for a company if looked at through that narrow lens (not saying that's the right lens, but from a director's POV it is, subject to complying with applicable laws and regulations). Not sure they did it all that well post-Macquarie's ownership, but a lot of money has been extracted over the years.

The whole thing is more a failure of regulation than anything else, not necessarily OFWAT itself, but there was clearly a need for much tighter restrictions on what sorts of financial engineering were permissible and impermissible within a regulated industry with natural monopoly assets (floated out from state ownership).

 

[Jacob]

It was intended to maximise value for shareholders, .........

As such it is also the reason for the need for greater control/regulation/taxation as any commitment to serving their customers, let alone society as a whole, has been dropped.

Listen to this - they are talking about the water industry as I type; https://www.bbc.co.uk/programmes/m0027bnq

 

[DrPhill]

From Government hansards Thursday 22 February 2024 (https://hansard.parliament.uk/Lords...WaterAndSewageCompaniesDirectors’Remuneration)

"Since privatisation, £65.9 billion has been paid out in water company dividends. There was a 20% increase in executive pay last year, and Britain’s privatised water and sewerage companies paid £1.4 billion in dividends in 2022, up from £540 million the previous year. This was despite rising household bills and a wave of public outcry over sewage leaks."

 

[Jacob]

From Government hansards Thursday 22 February 2024 (https://hansard.parliament.uk/Lords/2024-02-22/debates/55D8B31D-41B2-4991-80D7-1F61127249BA/WaterAndSewageCompaniesDirectors’Remuneration)

"Since privatisation, £65.9 billion has been paid out in water company dividends. There was a 20% increase in executive pay last year, and Britain’s privatised water and sewerage companies paid £1.4 billion in dividends in 2022, up from £540 million the previous year. This was despite rising household bills and a wave of public outcry over sewage leaks."

This is exactly how Freidman and Hayek say businesses should be run; neo-liberalism in action, as promoted by Thatcher and Reagan and still the common model.
Free-markets don't exist - we can't choose whether or not we want water.

 

[Jake]

As such it is also the reason for the need for greater control/regulation/taxation as any commitment to serving their customers, let alone society as a whole, has been dropped.

Yes I agree. Unfortunately it is hard to reverse the privatisation for costs reasons, but it has been a complete failure. It might have worked better with more thought given to the legal structure for a natural monopoly, but it is far from clear any public advantage other than a very short term cash injection for HMT was actually gained from privatisation and there have clearly been massive problems from both public service and customer charges perspective.

 

[Hypnotic Chimera]

Let me know if it is worth a read to clear up my knowledge of this murky world - in the case of the TW it sounds to me like legal theft of national taxes using a privatised essential monopoly.

His YouTube films are very good and cover a lot of this stuff - including the role of Private Equity in all of this water "industry" debacle (FFS - placing water into the hands of "for profit" is just fundamentally stupid.)

 

[Hypnotic Chimera]

Yes I agree. Unfortunately it is hard to reverse the privatisation for costs reasons, but it has been a complete failure. It might have worked better with more thought given to the legal structure for a natural monopoly, but it is far from clear any public advantage other than a very short term cash injection for HMT was actually gained from privatisation and there have clearly been massive problems from both public service and customer charges perspective.

I don't particularly agree that "more thought" would have avoided the debacle in any way, shape or form. Private Equity would just have found another novel way to extract the money from the assets.

 

[Jake]

I don't particularly agree that "more thought" would have avoided the debacle in any way, shape or form. Private Equity would just have found another novel way to extract the money from the assets.

Maybe, but you could for instance have prevented water companies from securitising the operating assets, or kept the infrastructure assets in public ownership and leased them to the private operator, etc, no doubt many more ways to skin the cat better than they did (albeit it would still be a skinned cat). For my part, I think it has been shown that public ownership (and operating) worked better, but my point is simply that if you take privatisation in some form as the given premise, it was done very badly.

 

[Blackswanwood]

It was intended to maximise value for shareholders, which is a legitimate aim for a company if looked at through that narrow lens (not saying that's the right lens, but from a director's POV it is, subject to complying with applicable laws and regulations). Not sure they did it all that well post-Macquarie's ownership, but a lot of money has been extracted over the years.

The whole thing is more a failure of regulation than anything else, not necessarily OFWAT itself, but there was clearly a need for much tighter restrictions on what sorts of financial engineering were permissible and impermissible within a regulated industry with natural monopoly assets (floated out from state ownership).

I agree it’s a failing of regulation and doubt that OFWAT had the expertise in their ranks to understand what was happening.

I’m not sure that it is okay for a director to just focus on maximising profit. My view may be coloured by having been involved in securitisation as an MRT where a conduct and prudential regulator took more than a passing interest, but I also believe the Company’s Act requires the long term impact of decisions, interest of employees, relationships with customers etc to be taken into account by directors.

 

[Jake]

I agree it’s a failing of regulation and doubt that OFWAT had the expertise in their ranks to understand what was happening.

My guess would be that they didn't have the powers to stop it anyway because things weren't gamed out properly during privatisation, nor adjusted along the way to adapt to circumstances. We seem to have a bit of a chummy 'regulatory capture' problem too, where people circulate between industry and regulators.

I’m not sure that it is okay for a director to just focus on maximising profit. My view may be coloured by having been involved in securitisation as an MRT where a conduct and prudential regulator took more than a passing interest, but I also believe the Company’s Act requires the long term impact of decisions, interest of employees, relationships with customers etc to be taken into account by directors.

Yes that's true, although probably mostly honoured by the lip service (not that it should be).

 

[Ozi]

Not relevant but Benny Hill and Ernie drove the fastest milk float in the West.

Absolute proof - The West is left of center