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Moody’s has downgraded Thames Water’s credit rating to “junk” status, threatening to put the struggling UK utility company in breach of its licence and adding pressure to its £16.5bn debt.
On Wednesday, US credit rating agency Moody’s downgraded Thames’ credit rating by two notches to Ba2 – taking the bank below investment grade and into so-called “junk” territory – citing the water company’s “weakening liquidity position” and the possibility of breaching covenants on its debt.
The water utility needs to maintain two investment ratings to comply with its licence, unless water regulator Ofwat makes an exception and grants some leniency. Ratings agency S&P said earlier this month that it could also downgrade the utility’s safest bond, which has the lowest investment rating.
Thames Water said it had warned Ofwat “of the possibility of a credit rating downgrade in April 2024 and continues to work with Ofwat to maintain the business’s current financial resilience”.
A credit rating downgrade could also increase borrowing costs for the company, which provides water and wastewater services to about 16 million households and is seeking to avoid a government takeover – a form of temporary renationalization.
A Sar order can be triggered if a company is unable to pay its debts or is found to be in breach of its core duties of providing efficient water supply and sewerage systems.
The company said it has enough cash will run until May next year but needs to raise £750m of equity from investors by then and a further £2.5bn by 2030.
Thames Water shareholders — including Canada’s Omers pension fund, the UK’s USS universities scheme and several sovereign wealth funds — declared in April that the business was “uninvestable” and withdrew a commitment to invest a further £500m.
While Thames Water is looking for new investors, it may struggle to attract new capital due to restrictions imposed by Ofwat on its ability to increase consumer bills. In a draft ruling earlier this monthOfwat has proposed a water bill increase of around a fifth, well below the 33 per cent average demanded by UK water companies.
Moody’s noted on Wednesday that without an injection of equity, Thames Water “forecasts a breach of its trigger financing ratio”, meaning the company would have to seek permission from bondholders to borrow more money.
The financial model The model used by Thames Water, where cash flows are served by different levels of debt, tends to result in higher investment ratings for the highest-rated bonds compared to standard corporate bonds at companies with similar debt levels.
Moody’s rating action means the utility’s top-rated “A” bonds are now rated just below investment grade, while its second-rated “B” bonds have slid deeper into junk territory.
Some of Thames Water’s A-bonds are now trading at below 70p on the pound, suggesting even top bondholders are bracing for deep cuts, while the company’s B-bonds are being offered at just a quarter of their face value.
In addition to the £16.5bn debt at the utility company managed by Thames Water, the company’s parent company has borrowed further, bringing the group’s overall debt burden to more than £18bn.
Bonds from parent company Kemble Water — named after a rural English village near the source of the River Thames — have now defaulted as investors brace for near-total losses.
Sir Keir Starmer told the House of Commons on Wednesday that the government would meet the bosses of troubled water companies “to hold them to account for their performance”.
“Customers should not have to pay the price for poor management by water companies and we have announced steps to bring water companies under tighter regulation,” the Prime Minister said.
Matthew Topham, of We Own It, an organisation campaigning for renationalisation, said:
“A special authority must be deployed to protect the public interest by transferring the Thames into permanent public ownership.
“Only then can governments stabilize business by unlocking investment faster and cheaper — while protecting the public from paying the costs of privatization failures.”
