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Thames Water has had its credit rating slashed to “junk” status by Moody’s, threatening to put the troubled UK utility in breach of its licence and piling more pressure on its £16.5bn debt pile.
US credit rating agency Moody’s on Wednesday downgraded Thames two notches to Ba2 — putting it below investment-grade and into so-called “junk” territory — citing the water company’s “weakening liquidity position” and the potential for covenant breaches on its debt.
The water utility needs to maintain two investment-grade ratings in order to comply with its licence, unless water regulator Ofwat makes an exception and allows a degree of leniency. Rating agency S&P said earlier this month that it could also downgrade the utility’s safest class of bonds, which have the lowest investment-grade rating.
Thames Water said that it had alerted Ofwat “to the possibility of potential credit rating downgrades in April 2024 and continues to work with Ofwat to maintain the ongoing financial resilience of the business”.
The ratings downgrade could also raise the cost of borrowing for the company, which provides water and sewage services to about 16mn households and is seeking to avoid being taken over by the government’s special administration regime — a form of temporary renationalisation.
The Sar could be triggered if the company is unable to repay its debts or is found to be in breach of its main duties to provide efficient water supply and sewerage systems.
The company says it has enough cash to last until next May but needs to raise £750mn in equity from investors by then, and a further £2.5bn by 2030.
Thames Water’s shareholders — which include pension funds Omers of Canada, Britain’s USS universities scheme and several sovereign-wealth funds — in April declared the business was “uninvestable” and backtracked on a commitment to invest a further £500mn.
While Thames Water is seeking new investors, it could struggle to attract fresh capital due to limitations Ofwat placed on potential bill rises for consumers. In a draft ruling earlier this month, Ofwat proposed water bill increases of around a fifth, far short of the average 33 per cent requested by UK water companies.
Moody’s on Wednesday noted that without a fresh equity injection Thames Water “forecasts a breach in its trigger event financial ratios”, meaning it will have to seek approval from bondholders to borrow more money.
The financing model used by Thames Water, in which cash flows service different tiers of debt, tends to result in higher investment-grade ratings for top-ranked bonds than standard corporate bonds at companies with similar levels of debt.
Moody’s ratings action means that the utility’s top-ranked “class A” bonds are now ranked just below investment-grade, while its second-ranking “Class B” bonds have slipped deeper into junk territory.
Some of Thames Water’s class A bonds are now trading at less than 70p in the pound, suggesting that even top-ranking bondholders are braced for deep haircuts, while its Class B bonds are quoted at just a quarter of face value.
On top of the £16.5bn of debt at Thames Water’s regulated utility, its parent company has further borrowings, taking the group’s overall debt burden to over £18bn.
Bonds at parent company Kemble Water — named after a village in the English countryside near the source of the river Thames — are already in default with investors braced for near-total losses.
Sir Keir Starmer told the House of Commons on Wednesday that the government would meet the bosses of failing water companies “to hold them to account for their performance”.
“Customers should not pay the price for mismanagement by water companies and we’ve already announced steps to put water companies under a tougher regime,” the prime minister said.
Matthew Topham, of We Own It, which campaigns for renationalisation, said:
“Special Administration must be deployed to defend the public interest by transferring Thames into permanent public ownership.
“Only then can the government stabilise the business by unlocking faster and cheaper investment — while protecting the public from paying the costs of privatisation failures.”
