Ministers must hold the line on Thames Water. It got itself into a mess | Nils Pratley

Make-your-mind-up time approaches for the board of Thames Water. The directors may not like Ofwat’s so-called “final determination” last month – even though it allowed bill increases of 35% over the next five years – but, if they wish to dispute it, they are free to appeal to the Competition and Markets Authority (CMA). The deadline to do so is 18 February.

On the way, however, it seems Thames is engaging in another round of lobbying by trying to terrify the government into thinking the world will end if the company falls into the “special administration regime”, or SAR – the temporary nationalisation setup for failing or bankrupt water companies.

That, at least, is the way to read the report in the Times this week that Thames has warned ministers (again) that it is in danger of disappearing down the SAR plughole unless Ofwat coughs up more concessions. The corporate pitch should be familiar by now: think about the bondholders who would be burned if Thames collapses; they are also the folk you need to fund nuclear power stations, windfarms and more.

Anything is worth a try, of course, when you’re in a hole as deep as Thames’s. And, since the government is squatting on every regulator in the land to find ideas for economic growth (to the point of ousting the chair of CMA this week), raising visions of a riot in the debt markets is an obvious line to take.

Come on, though, we’ve been around this track already. If ministers are tempted to indulge corporate pleas for a bailout, they should remember that Thames got itself into this mess and, in a more rational world, its board and owners would have addressed the excess debts years ago. A few points are worth making.

First, as the name suggests, Ofwat’s final determination is meant to be its last word on bills and business plans for the next five years. As with all the water companies, the numbers were decided after two years of back-and-forth and the submission of tens of thousands of pages of documents. Ministers, if they still place any value on independent regulation, should not meddle in minor details of the deal.

Second, across the water industry as a whole, Ofwat’s verdict last month was seen as mildly helpful for the companies. The regulator’s greater generosity on cost of capital – one of the key numbers in the mix – was described on the day by analysts at Barclays and Jefferies as a “positive” outcome for the three firms that are still listed in the stock market. If the figure still wasn’t generous enough for Thames, tough. The system cannot give preferential treatment.

Third, Ofwat’s deal was also stuffed with many of the special revenue-sharing and “gated” mechanisms that the industry had requested to make it easier to raise capital. Again, there is a limit to how many tailor-made features can be handed to one company.

Fourth, debt markets are already adjusting. The small “B” class of Thames debt is trading at pennies in the pound and the “A” class, representing the bulk of the £16bn of borrowings, is at about 70p. In other words, the holders already realise there will be haircuts in the inevitable financial restructuring.

Fifth, those holders also know their losses would be greater under an SAR setup because they would lose control of the process. So they have every incentive to agree a debt-for-equity swap among themselves, rather than having one imposed upon them. Let them get on with it, whether or not that involves a detour to the CMA.

None of which is to deny that the bankruptcy of the country’s biggest water company would be poor advertising for a government trying to promote its growth credentials. But the outrageous outcome would be gifts to bondholders at the expense of taxpayers or billpayers, which would also be worse in the long-run for the government itself. No wobbling.