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Thames Water has had its credit rating slashed to “junk” status by S&P, putting the struggling utility in breach of its licence conditions and pushing Britain’s largest water utility closer to renationalisation.
Rating agency S&P on Wednesday said it had downgraded Thames’s safest class of debt to BB, lowering its credit rating two notches below investment grade and stripping the utility of its only remaining such rating. It had previously been rated at BBB-, the bottom investment-grade rating provided by S&P.
It also said that holders of Thames’s riskiest bonds could be completely wiped out in the case of a hypothetical default, while investors in Thames’s safest tier of bonds were expected to get 70 per cent of their money back.
“We do not believe that Thames Water will have a remedy plan to cover its liquidity needs by 1.1x for the next 12 months before the autumn of 2024,” S&P said. “In addition, the company is in breach of its current licence conditions.”
The move by S&P — which follows a ratings cut by Moody’s last week — places Thames Water in breach of its licence, raising the risk of a fine from regulator Ofwat, and could increase the cost of further borrowing for the group, which has a £16.5bn debt pile at its operating entity.
The utility, which provides water and sewage services to about 16mn households in London and surrounding areas, has more than £1bn of loans that need refinancing by next year, only some of which can be rolled over. It says it has enough cash to last until May so long as it can raise £750mn in equity by then. However, existing shareholders — a clutch of pension, sovereign wealth and private equity funds — are refusing to put cash into the business.
Thames Water needs to maintain two investment-grade ratings in order to comply with its licence, unless Ofwat makes an exception and allows a degree of leniency. But last week Moody’s took the same action, downgrading Thames’s most senior debt to junk, meaning it now has no investment-grade ratings.
Ofwat said: “This latest downgrade further reinforces our position that a comprehensive financial and operational turnaround in Thames’s operations is essential.”
The breach of licence conditions puts Thames at risk of a fine of up to 10 per cent of annual revenue, which rose to £2.4bn last year.
The government, Ofwat and Thames Water are keen to avoid the company being renationalised under the government’s special administration regime. Earlier this week, Steve Reed, the environment secretary, said Thames Water would not be temporarily nationalised because it remains “financially viable”.
In an attempt to avoid renationalisation Ofwat has proposed bringing the company under a newly created special measures scheme, which would make it subject to additional regulatory oversight.
Thames Water said it “continues to work with Ofwat to maintain the ongoing financial resilience of the business. Management is engaging with investors and its creditors and remains committed to seeking new equity funding and exploring all options to extend its liquidity runway.”
Ewan McGaughey, professor of law at King’s College, London, said that if the government prevented investors from taking a 100 per cent loss on their investment it would “be an unwise decision”.
He said: “All the government has to do to avoid bailing out the banks to which water companies owe debt is to show that continuing to pay them would interfere with the investment needed to maintain sewers and drinking water.” Large banks knew the risks of investing in privatised water companies and have expensive advisers, he added.
On top of the £16.5bn of debt at Thames Water’s regulated utility, its parent company Kemble Water has further borrowings, taking the group’s overall debt burden to more than £18bn.
Bonds at Kemble are already in default with investors braced for near-total losses.
