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Moody’s has downgraded Southern Water’s credit rating to junk, pushing the heavily indebted utility to the verge of default and underscoring the growing financial strains on the UK’s privatised water utilities.
Southern Water, which is controlled by Australian infrastructure investor Macquarie, is among the UK’s most indebted water companies and is struggling with rising borrowing costs across its more than £6bn debt pile.
Rating agency Moody’s on Wednesday evening downgraded Southern Water’s credit rating to Ba1, putting it just below investment grade, while keeping it on review for further downward revision.
Moody’s cited a “history of material operational and financial underperformance” at the utility, with the downgrade coming as part of a broader review of the UK’s privatised water sector.
“In the face of continuing public scrutiny and heightened political and regulatory focus, there has been a material and sustained weakening of credit quality for nearly all companies,” the rating agency said.
The downgrade pushes Southern Water one step closer to a default because of a covenant in its bonds that is triggered if it loses two of its investment-grade credit ratings. Rating agency S&P also downgraded Southern Water this month to one notch above junk while warning that further downgrades could follow.
S&P took action after Southern Water borrowed £300mn from bond investors at interest rates far higher than those envisaged by water regulator Ofwat, with bondholders demanding yields of up to 10 per cent to lend to the company.
“The downgrade by Moody’s will have no impact on the services we provide to our customers,” said Southern Water. “As Moody’s acknowledges, we maintain a strong liquidity position.”
The mounting pressure on Southern Water adds to the strain on the UK’s privatised water companies, which have come under growing scrutiny due to the increasingly precarious financial situation of the largest, Thames Water, and over infrastructure failings including water leakage and sewage pollution.
Southern Water, which supplies 4.7mn customers in the south-east of England, has asked Ofwat to allow it to increase the average annual household water bill to £734 by the end of the next regulatory period, higher than any other water company in the UK.
The utility has also recently been in discussions with a private supplier to import water from Norwegian fjords by tanker to mitigate against potential supply shortages and drought.
Southern Water’s majority owner Macquarie also previously owned Thames Water, which is battling to avoid a renationalisation as it groans under a near £19bn debt pile. Macquarie has said it plans to inject £650mn more equity into Southern Water to bolster its balance sheet, but this is dependent on a favourable settlement with Ofwat next month.
Assured Guaranty, a New York-listed insurance group that has amassed more than £10bn of exposure to UK water company debt, disclosed this week that it had already downgraded its “internal rating” on Southern Water to below investment grade.
Assured Guaranty, which specialises in insuring the risk of default on bonds, has more than $2.5bn-equivalent of exposure to Southern Water’s debt, which is the insurer’s largest credit exposure outside of the US.
It also has more than $2bn-equivalent of exposure to Thames Water’s debt and is part of a group of its top-ranking bondholders that have agreed to provide an up to £3bn emergency loan to the company.
Assured Guaranty did not respond to a request for comment.
