(Bloomberg) -- Some lenders to Thames Water could face losses of as much as 40% in the event that it ends up being nationalized by the UK government, according to contingency plans drawn up by officials.

The highly indebted water utility, which supplies a quarter of people in England, is in crisis after its parent company Kemble Water Holdings Ltd. last month refused to inject any more money into the business, blaming restrictive regulation from Ofwat. Kemble then defaulted on its debt a week later after failing to make an interest payment.

Thames Water postponed until next week, a key update to its business plan that was originally scheduled for Friday. The company is required to submit its plan to the regulator under a five-yearly price review process, known as PR24. An Ofwat draft decision, scheduled for June 12, is seen by investors as a key indicator for the future of Thames.

Thames Water Delays a Business Plan Update Slated for Friday

“It is important that we get further clarity on the situation surrounding Thames Water such that the sector can focus on fixing issues in the network and meeting statutory obligations,” analysts at RBC Capital Markets LLC said.

Ministers and government officials have sought to play down the chances of Thames being taken into public ownership any time soon, with Prime Minister Rishi Sunak’s administration pressing it to resolve its financial difficulties alone and without taxpayers footing the bill.

Yet internal government planning under the title “Project Timber” has considered the possibility of the utility being nationalized, according to a person familiar with the plans. That outcome would see some bondholders, in particular smaller share creditors to Thames known as category B bondholders, take a “haircut” of 35% to 40% on the value of their loans, the person said. The majority of bondholders would face smaller losses of 5% to 10% under the plans, they added. The Guardian first reported the plans Thursday.

Officials at the Department for the Environment, Food and Rural Affairs declined to answer questions about the contingencies being drawn up for Thames Water. A spokesperson said only that the government prepares for a “range of scenarios.”

Speaking in Washington on Wednesday, Chancellor of the Exchequer Jeremy Hunt said consumers shouldn’t foot the bill for mistakes made by the management at Thames. “What we’re never going to do for investors in the UK, is say that the state is going to insure against bad decisions made by management or shareholders,” he added, insisting: “That’s what markets are about.”

(Updates with quote in fourth paragraph.)

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