Moody's warns of weak credit quality among new water retailers

Credit quality among retailers in the planned business water market in England is likely to be “modest” or "weak" according to credit rating agency Moody’s Investment Services. But retailers who will – like some newly created operations from incumbent water companies – be part of a broader group, will have an upper hand said Moody’s.

Moody’s forecast, in a note to investors, of “weak stand-alone credit quality” among new water retailers was based on their anticipated small scale, volatility in their working capital and limited track record in a new market as well as their limited ability to differentiate services.

But membership of a larger group, said Moody’s, could be a “supportive factor”. It pointed out that while many water retailers may be stand-alone entities, a number of incumbent water companies will operate retail subsidiaries. Any such retailer of low stand alone credit quality could benefit from “implicit or explicit parental support,” said Moody’s.

The agency emphasised that “support” could not be through non-permitted direct cross-subsidy or guarantees from a regulated monopoly business. But it highlighted that those restrictions wouldn’t apply to parent holding companies. Moody’s went on to say: “While detailed credit terms for the non-household retail market have not been fully finalised, initial proposals, consulted upon by the regulator, would provide adequate risk protection at current rating levels for incumbent water companies.”

Moody’s warned that wholesalers’ counterparty risk could grow under a new retail market in business water. A default by a retailer could hit a wholesale supplier’s revenue due to the retailers' role as revenue collection agents. But Moody’s said such risk could be mitigated by requiring the retailer to pay in advance, or post collateral or other sureties.