Thames Water has announced that its preferred bidder for a potential £4bn rescue deal, KKR, has pulled out of discussions.

The water utilities firm said the decision came after the completion of the US private equity firm’s phase two diligence stage.

This involved the firm and senior creditors preparing detailed plans, including turnaround plans, which were shared with Thames Water.

Following KKR's decision not to proceed, Thames Water intends to progress discussions on the senior creditors’ plan with the water services regulator, Ofwat, and other stakeholders.

Chairman at Thames Water, Sir Adrian Montague, said: "Whilst today's news is disappointing, we continue to believe that a sustainable recapitalisation of the company is in the best interests of all stakeholders and continue to work with our creditors and stakeholders to achieve that goal."

The announcement comes after Thames Water was delivered the largest ever penalty imposed by Ofwat, totalling £122.7m, following breaches relating to its wastewater operations and dividend payouts.

As part of the fines, the company and its shareholders will pay a £104.5m penalty, while Thames Water will also have to pay an additional £18.2m.

Restructuring and insolvency partner at DMH Stallard, Michael Lynch, said: "For Thames Water, the challenge is to keep the rescue deal afloat; without investor support, the liquidity tap provided by the court approved restructuring plan may turn off, which may force its creditors to reconsider special administration."

Investment director at AJ Bell, Russ Mould, concluded: "It looks increasingly like Thames Water will have to be renationalised, after US private equity firm KKR pulled out of plans to inject £4bn into the business.

"KKR’s U-turn is a surprise, given its investment seemed like a done deal. The government indicated all through the fundraising process that it was ready to step in and take over Thames Water if necessary. If this does happen, it would represent a soggy end to what’s been a failed privatisation.

"Thames Water has been like a sponge, soaking up debt and getting into a financial mess."

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