Andy Burnham
Andy Burnham’s government is preparing to place Thames Water into a special administration regime (SAR), moving toward temporary public control. Facebook/Andy Burnham

A consortium of investors holding most of Thames Water's debt has instructed lawyers to prepare a legal challenge if an incoming government led by Andy Burnham brings the company into public ownership. The move comes as ministers prepare to decide whether to back a private rescue plan or place the company under temporary state control.

The London & Valley Water (L&VW) consortium, which represents creditors holding about £17 billion of Thames Water's roughly £21 billion debt ($28 billion), has appointed litigation firm Pallas Partners to advise on potential court action if its rescue proposal is rejected. People close to the consortium said the move was precautionary and lenders remained willing to work with the new government on a privately funded rescue plan.

The legal preparations come as Burnham prepares to become prime minister on Monday after signalling support for greater public control of key utilities. Last month, he said greater public ownership was the appropriate solution for Thames Water, arguing that privatisation had failed to resolve the company's long-running problems. Ministers have not confirmed whether the company will be brought into public ownership.

Creditors Press Ahead With Rescue Proposal

The consortium, which includes Apollo Global Management, Elliott Management, Farallon Capital Management and Silver Point Capital, has proposed writing off £9.6 billion ($12.9 billion) of existing borrowings while injecting £3.35 billion ($4.51 billion) of new equity alongside £6.25 billion ($8.41 billion)of new debt.

A person close to the consortium said there was 'no legal action being taken at this point' and described the legal preparations as 'purely precautionary,' adding that lenders wanted to work constructively with ministers to reach a solution.

The proposal has been submitted to regulator Ofwat as part of a solvent restructuring designed to keep the company operating without entering a Special Administration Regime (SAR), which would place the company under temporary state control while a longer-term solution is sought.

Government Raises Concerns Over Deal

The Department for Environment, Food and Rural Affairs said it was prepared for any outcome, while Environment Secretary Emma Reynolds questioned whether the lenders' proposal provided sufficient protection for consumers.

In a letter to Ofwat, Reynolds said she remained unconvinced that the restructuring plan provided sufficient protection for consumers or the environment and warned the proposed regulatory changes could ultimately lead to higher water bills.

Ofwat chair Iain Coucher said a revised proposal was being developed and that the regulator would assess any new submission in line with its statutory duty to protect customers.

Nationalisation Could Trigger Legal Challenge

If ministers reject the rescue plan, Thames Water could be placed into a Special Administration Regime. The company warned this week that it has sufficient funding only until the end of the year, increasing pressure on ministers and regulators to reach a long-term solution.

Sources close to the consortium told Sky News creditors would seek repayment through the courts if the company entered public ownership, although they said litigation would be pursued only as a last resort.

The utility, which serves around 16 million customers across London and the Thames Valley, also revealed in its annual results this week that chief executive Chris Weston received a £1.16 million ($1.56 million) pay package, prompting renewed scrutiny of the company's finances.

Ofwat is continuing to assess revised restructuring proposals, while ministers have yet to decide whether Thames Water should remain under private ownership or enter temporary state control.

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