Moody’s Ratings has lowered the credit rating of Thames Water to junk.
This downgrade came after UK water regulators placed the firm under a new turnaround regime because of concerns over its financial stability.
The decision will have a significant impact on the future strategy of financial management for this utility.
Thames Waters’ class A debt is downgraded from Ba1 to B3
Moody’s has downgraded Thames Water Utilities Finance Plc’s senior secured debt to Ba1, a notch below junk status.
Class B notes have been downgraded to B3 and corporate family ratings to Ba2.
Credit outlook for the company remains poor. The company’s credit outlook remains negative.
Thames Water faces financial and regulatory difficulties
Thames Water’s operating license, which stipulates that the company must maintain at least two ratings of investment grade, could be in violation if it is downgraded.
Moody’s key decision was based on the “weakening of liquidity” in water utilities and possible covenant breaches with its debt.
S&P Global Ratings also indicated that it may downgrade bonds of the safest category for the utility, currently rated at the lowest investment grade.
Thames Water began discussions with Ofwat, the regulator of water in April 2024. They were alerted to possible credit ratings downgrades.
Ofwat has worked with the company to ensure its financial stability and to avoid the special administration regime of the government (SAR), which is a temporary renationalisation if an organization fails to fulfill its main obligations or financial obligations.
Investor concerns and debt implications
Thames Water provides water and sewer services to 16 million homes.
The company may find it difficult to bring in new investors if they are struggling to meet their financial obligations, particularly as the firm aims to raise PS750m by May next year and another PS2.5b by 2030.
Shareholders of the company, including pension funds like Canada’s Omers and Britain’s USS Universities Scheme, as well as several sovereign wealth funds have expressed concern about further investment.
They labeled it “uninvestable”, and retracted a commitment made previously to invest another PS500million.
Investment challenges in the future and regulatory limitations
Ofwat limits on bill increase for customers could complicate Thames Water’s attempts to secure new investments.
Ofwat’s draft decision earlier this month suggested increases of just about one fifth. Water companies in Britain have asked for an average of 33 percent. The discrepancy may deter investors who are looking to make higher returns.
Moody’s has highlighted the fact that if Thames Water does not receive a new equity injection it will breach its trigger financial ratios. This would require bondholders’ approval to raise more funds.
Thames Water’s financing model, in which cash flow is prioritized to pay off different levels of debt, led to higher ratings on top-rated bonds than standard corporate bonds.
Financial implications and market reaction
Some Thames Water class A bonds currently trade at under 70p per pound. This indicates that even the highest-ranking bondholders have prepared for substantial financial losses. Class B bonds trade at a mere quarter of the face value.
Kemble Water has borrowed additional money on top of its PS16.5billion debt with Thames Water. This brings the total debt for the entire group to more than PS18billion.
Investors are bracing for a near total loss of their bonds at Kemble.
Measures of accountability and government response
The UK’s Prime Minister, Sir Keir starmer spoke to the House of Commons in the UK on Wednesday. He said that the Government would hold the heads of water companies failing due to their poor performance accountable.
We have already taken steps to make water companies more accountable.
Investors, regulators and customers will closely monitor Thames Water’s financial stability and service quality as it navigates through these challenges.
As new information becomes available, this post Moody’s Downgrades Thames Water’s Credit Rating to “Junk” Citing Weakening Liquidity Position may be updated.
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