Creditors of Thames Water are braced to write off £6 billion, or one third, of its debt if KKR successfully takes control of the company.

Additionally, according to informed sources, creditors will only be able to swap their debt for new equity in the troubled regional water monopoly if they are prepared to inject more cash.

In any event it is understood that such investors will have no say in the running of the company as KKR, an American private equity giant, intends to create a two-tier share class structure in which it controls 100 per cent of the voting rights.

It has further emerged that if KKR’s bid for Thames is successful, it would aim to crystallise returns, which could be more than double the original investment, by floating Thames Water on the stock market at or around the time of the next-but-one regulatory settlement in 2035.

The infrastructure arm of KKR is finalising its proposed bid for Thames before a deadline of the end of this month. Major hurdles remain, however.The details of the bid and a turnaround plan will go before Ofwat. It is understood that the regulator will review those proposals against its February final determination for the current five-year regulatory period, which allowed Thames to increase customers’ bills by 35 per cent but set challenging performance targets.It is understood that Thames’s operations are in such a mess that penalties for missing those targets as they stand — to improve pollution incidents, mains leakage and customer service — could rise above £1 billion over the next five years.A poor governance and leadership structure at Thames has prevented a focus on fixing leaks, KKR believesMAUREEN MCLEAN/ALAMYIf the target and penalty regime for Thames remains, industry experts believe that will put off any new investment and credit rating agencies will continue to rate the water utility’s debt as junk. If Thames cannot move its debt to cheaper investment grade status and no new money is invested, Ofwat and ministers would then have to call in special administrators in what would effectively be renationalisation.• How will you rescue Thames Water? MPs seek answers from chairman“The company is broken and Thames has maxed out the credit card,” said one industry executive. “If the performance targets and the penalties are too high, capital will bleed out of the company. If it does not have positive cashflows, the company cannot be fixed.” Senior sources indicate that the proposed KKR bid would seek to cut the debt-to-asset-value ratio at Thames to a best-in-sector level of 60 per cent.The regulatory asset value of Thames stands at about £20 billion. Its debts are believed to be about £18 billion, or a gearing ratio at unprecedented levels of 90 per cent. To achieve KKR’s proposed gearing ratio, creditors would have to take a haircut of about £6 billion.KKR is believed to be prepared to welcome co-equity investors of up to 50 per cent of the economic ownership of Thames, matching as much as £2 billion alongside KKR for a total £4 billion cash injection. It is understood such investors would not be granted voting rights.• Alistair Osborne: Water regulation is a mess just when we need the spending tapsKKR is moving towards the end of a due diligence period in which about a hundred of its professionals and advisers have been going over the Thames books and reviewing the assets. It is reckoned to have concluded that a poor governance and leadership structure has prevented a focus on fixing leaks, which would improve the company’s drought resilience and prevent reputation-damaging sewage overflows.KKR is not making any comment on its proposals at this stage.In its last statement, when it named KKR as its preferred bidder, Thames said: “Agreed transaction terms are targeted for the second quarter of 2025 with a view to completing a recapitalisation in the second half of 2025.”It said it expected creditors to suffer “a material impairment” but added: “There is no certainty that a binding equity proposal will be forthcoming as it remains subject to [due] diligence, documentation and regulatory and other approvals. As a result, certain senior creditors continue to progress in parallel alternative transaction structures to seek to recapitalise the business.”