Debt puts water sector at risk of banking-style crash warns rating agency

The UK water industry is vulnerable to a debt-fuelled crisis akin to the banking crash in 2007 according to research by rating agency, The Environmental Rating Agency (ERA). The agency warned that, like banking, the water sector is too big to fail and its current debt levels poses a risk of collapse and the need for a massive government bailout.

Shock changes in interest rates or inflation could bankrupt UK water firms and force government to step in, as it did with the banks, and take on up to £50 bn of industry debt said ERA in a recent report.

It documented a number of environmental violations by the water industry and attributed them largely to sector’s debt burden and over reliance on self-policing.

“The environmental problems documented in this report are the result of regulatory and financial problems that have mounted up over decades,” said ERA. It added: “[The water companies] need less dependence on long-term debt, annual borrowing and sophisticated financial engineering so that they become sufficiently resilient to absorb unexpected changes to interest rates, inflation or credit risk ratings.”

ERA examined the recent prosecution of Thames Water over illegal sewerage discharges which resulted on the company being fined £20m, It concluded that the behaviour of Thames questioned the reliance on self regulation; ‘We see the reliance on corporate self-reporting and voluntary disclosures as am endemic failure in the financial system,” said ERA.

The agency categorised the nine English water and sewerage companies as

  • moderate financial and environmental risk (Wessex, Severn Trent, Northumbrian and United Utilities);

  • moderate environmental risk and high financial risk (Yorkshire, Southern, Anglian and Thames); or

  • low financial risk, high environmental risk (South West).