Thames Water's problems are too big to simply be flushed away

The US private equity giant KKR has pulled out of a £4bn rescue deal for the beleaguered utility, citing political risk. What now

- Barney Macintyre

After last-minute talks with Downing Street, the US private equity group KKR pulled out of a £4bn rescue package for Thames Water, citing political risk.

So what?

The stinking saga has become a must-watch for directors and executives, offering salutary lessons on stakeholder and reputation management, pay and how (not) to handle a crisis.

"This will be a business school case study for years to come," says Dieter Helm, an expert on utilities at the University of Oxford.

"The longer it runs on, the more inevitable special administration is, and the greater the costs and consequences of this huge corporate failure."

How did we get here?

Most of Thames's problems flow from its £20bn debt pile, largely amassed in an era when interest rates were near zero. Investors such as Germany's RWE and Australia's Macquarie left the utility with a high ratio of debt to equity while paying out hefty dividends to shareholders.

When interest rates rose - or, more accurately, normalised - Thames was left high and dry. Investment that should have gone towards upgrading a system of Victorian sewers beneath London serving 16 million people was instead helping pay off interest.

Who's on the hook?