Moody’s last week spoke up in defence of highly leveraged water companies and the highly covenanted financing structures that facilitated their gearing up to around 85%. This is against the backdrop of Ofwat’s criticism that such companies have lower financial resilience and its PR19 pressure to reduce gearing through lower allowed returns.
In a report, one of two published to coincide with the rating agency’s annual UK Water Sector and Regulated Networks conference, Moody’s pointed out that highly leveraged companies have not underperformed their peers.
“While companies in highly covenanted structures have been accused of focusing on financial engineering rather than operational performance, some have been consistently among the strongest performers in the sector.” It added that operational performance will be more important post 2020, with stronger incentives increasing the possibility of greater cash flow volatility. It also said highly covenanted financial structures mitigate a range of risks, including those associated with higher leverage.
The agency further pointed out that even as gearing falls after 2020, financing structures will continue to have value with business restrictions, liquidity reserves and creditor step-in rights, among others, providing credit enhancement.
Close to 60% of the industry in terms of regulatory capital value have adopted highly covenanted financing structures.