QIC Remains Silent on Thames Water Stake Amid Financial Struggles

Highlights:

• Significant Debt Challenges: Thames Water faces severe financial instability with its largest shareholder, OMERS, writing off a 31.7% stake and bondholders preparing for downgrades to junk status.
• QIC's Valuation Strategy: Queensland Investment Corporation (QIC) has not marked down its 5.4% stake in Thames Water, opting for internal valuation methods to maintain return flexibility.
• Historical Financial Mismanagement: Critics blame financial mismanagement from 2006 to 2017, during Macquarie's partial ownership, for Thames Water's current debt and financial woes, despite Macquarie's defense of increased infrastructure investment.

Queensland Investment Corporation (ASX: QIC) remains tight-lipped about its valuation in the embattled Thames Water, a London utility facing significant debt and potential government intervention.

Financial Turmoil and Debt Concerns

Thames Water, heavily indebted and grappling with financial instability, has its largest shareholder, Canada's OMERS, write off its entire 31.7% stake. QIC, owning 5.4% of Thames Water, has not marked down its valuation despite the utility's financial troubles. Thames Water bondholders are preparing for billions in outstanding securities to be downgraded to junk status, following a debt default in April. S&P Global Ratings has indicated a possible downgrade of Thames Water's investment-grade bonds to sub-investment grade due to liquidity issues.

Opaque Valuations and Internal Assessments

A QIC spokeswoman declined to comment on the valuation of their stake. Sources suggest that QIC is not compelled to revalue its privately held investment, allowing internal valuation. This internal assessment method provides flexibility, as stated by one source, "Given the opaqueness of these funds, they can smooth their returns effectively as they choose."

Historical Financial Mismanagement

Critics attribute Thames Water's current financial woes to the period between 2006 and 2017 when Macquarie Asset Management partly owned the company. During this time, debt levels increased from £6 billion to £11 billion, accompanied by substantial dividends to shareholders. Macquarie disputes this narrative, highlighting that the regulated asset base grew from £6.5 billion to £13 billion, supporting future revenue through infrastructure investments.

Southern Water's Parallel Struggles

Macquarie, now invested in Southern Water, faces similar issues. Britain's water regulator, Ofwat, criticized Southern Water for being overly leveraged and having an inadequate five-year business plan, potentially resulting in a £54 million fine. Macquarie Asset Management has invested over £1 billion in equity into Southern Water, owning 82% of the company.

QIC has not disclosed the value of its Thames Water stake. The asset manager’s infrastructure division has been active, including hiring Barrenjoey Capital Partners to review its 58% stake in New Zealand's Powerco and evaluating Global Switch Australia.

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