(Bloomberg) -- A US insurance firm with at least $2 billion in exposure to Thames Water Utilities Finance Plc is working with bondholders and advisers to protect their interests ahead of potential debt talks, according to people familiar with the matter.

Assured Guaranty Ltd. and a group of noteholders have tapped lawyers at Kirkland & Ellis LLP and bankers at PJT Partners Inc, the people said, talking on the condition of anonymity. The insurer works with issuers of debt and provides insurance on notes that can mitigate losses for bondholders.

The US firm had an overall exposure of $2.1 billion-equivalent to Thames Water as of the end of 2023, according to its annual report. It was the second-largest exposure for the company outside of the US.

The group is forming to protect the interests of so-called Class A noteholders in advance of possible discussions with Thames Water. Some bondholders wrote to Thames Water through their lawyers seeking more information, but Thames representatives have so far declined to engage with creditors about the debt. Instead they maintained that the financial challenges lie with their parent company, the people said. 

Read more: How Debt and Sewage Pushed Thames Water to the Brink: QuickTake

Creditors to Thames Water could face losses if it ends up being nationalized by the UK government, according to contingency plans drawn up by officials. Junior creditors to Thames known as Class B bondholders would take a “haircut” of 35% to 40% on the value of their loans and the majority of bondholders would face smaller losses of 5% to 10% under the plans.

Spokespeople for Kirkland & Ellis and Assured Guaranty didn’t respond to requests for comment. A spokesperson for PJT and Thames Water declined to comment.

Thames Water is fighting to avoid restructuring or being taken into special administration. Its Chief Executive Chris Weston has maintained that Thames can still raise the billions of pounds in equity that it needs to deliver on its turnaround plan to fix chronic leaks and sewage spills, despite not having the backing of its shareholders.

Creditor Groups

The new group is the latest and potentially largest collection of creditors forming as the Thames crisis deepens. Another group of bondholders earlier this month picked Jefferies Financial Group Inc. as a financial adviser and Akin Gump Strauss Hauer & Feld LLP for legal representation in preparation for talks. 

Assured Guaranty has also provided guarantees for debt issued by other UK water companies. Its largest single-name exposure outside of the US is Southern Water Services Ltd, with an amount equal to $2.4 billion. Other positions are in Anglian Water Services Financing Plc and Yorkshire Water Services Finance Plc, according to its last report. 

The bonds of Thames Water have been falling in recent weeks due to rising concerns over the group’s roughly £16 billion ($20 billion) debt pile. Parent company Kemble Water Holdings Ltd. defaulted on its £1.35 billion liabilities after shareholders said they wouldn’t inject £500 million of capital as previously planned, and investors worry that a restructuring might spread to the operating companies as well. 

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