Lenders in Thames Water face losing up to 40pc of their money in the event of the troubled supplier being nationalised.
Details of the Government’s contingency plans have laid out the potential impact on creditors in Thames Water, which serves 16m people and is struggling under the weight of an £18bn debt pile.
The proposal, dubbed “Project Timber”, indicates that some bondholders in Thames could see the value of their loans slashed by between between 35 and 40pc if Thames fails, as first reported by The Guardian.
Plans being overseen by the Department for Environment, Food and Rural Affairs also signal that the bulk of Thames Water’s debts will be added to the public purse as part of a taxpayer-backed bailout.
If nationalised, the Government would manage Thames Water indirectly through an arms-length body.
Ministers would subsequently seek to return it to private ownership over time, with the prospect of the supplier being split into two separate companies.
Details of a possible break-up, as first revealed by The Telegraph earlier this month, signal that one entity could oversee London while the other will serve Thames Valley and the Home Counties.
The Government is understood to be reluctant to nationalise Thames Water, although the severity of the situation has forced policymakers to act.
Bosses at Thames Water are currently racing to secure its future in the private sector but were dealt a blow in March after shareholders cut off funding from the business.
Earlier this week, a leading bondholder in Thames Water warned that it was important to protect creditors’ interests.
Given its size, Mr Hickmore said Thames Water must reach a positive outcome for both “political and economic reasons”, as the risk of creditors losing out would knock confidence levels across Britain’s infrastructure sector overall.
He said: “They are one of the largest issuers in the UK. That’s a pretty important outcome for everybody, whether it be pensioners or insurance companies.”
It emerged on Tuesday that Thames bosses are also reportedly weighing a possible debt raise as it hunts for new cash to secure its future.
However, City sources played down the prospect, questioning why the beleaguered supplier would tap debt markets given it is already burdened by an £18bn debt pile.
A restructuring adviser involved in discussions said: “I find it mesmerising that any more debt could go in. No one would allow it. It seems crazy to my mind.”
On Thursday night, a Defra spokesperson said: “As a responsible government, we prepare for a range of scenarios across our regulated industries - including water - as the public would expect.”
Thames Water declined to comment but, last month, a spokesman said: “Thames Water intends to pursue all options to secure the required equity investment from new or existing shareholders.
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