Moody's Investors Service has changed from stable to negative its outlook on Bristol Water’s £40 million in index-linked securities due in 2041. The change largely reflects increased regulatory risk related to PR19. Moody’s also affirmed the securities’ rating at Baa1.
Moody’s said the outlook change was in the light of challenges anticipated from PR19, Moody’s’ more demanding financial ratio guidance and Bristol’s financial policy published in its business plan submission.
Moody’s said Bristol Water’s long-dated debt structure will make it unable to benefit from refinancing at currently attractive interest rates as assumed by the regulator in its cost of debt allowance.
“The likely reduction in allowed returns, as already indicated, by the regulator for the next regulatory period will therefore weigh on credit metrics. Potential cost efficiency challenges, as well as stretching performance targets as proposed in the company's business plan may result in further pressure,” said Moody’s.
The rating agency said there was an increasing risk that financial metrics will fall below Moody's minimum expectation of a 1.5 times Adjusted Interest Coverage Ratio for Bristol Water's Baa1 rating unless it could deliver significant outperformance or there was a “very favourable regulatory settlement”.