S&P warns downgrades Southern debt and warns of "material weakness"

S&P Global Ratings has lowered its ratings on Southern Water debt based on governance issues arising from the £126 million in penalties that Ofwat imposed on Southern Water for significant breaches of its licensee conditions and its statutory duties. The ratings agency warned of "material weakness" in the company's governance.

The ratings agency has reduced its issue ratings on the class A senior secured debt issues by Southern Water Services (Finance) (SWSF) to BBB+ from A- and its rating on the parent company, Southern Water (Greensands) Financing, to B.

The ratings agency said the outlook on both was negative, reflecting:

• the lack of track record on the mitigating measures put in place by the management;

• uncertainty around an ongoing investigation by the Environment Agency (EA) on the licence breaching actions; and

• potential further litigation that may arise from consumers’ responses to a consultation on the Ofwat-imposed penalties that runs until July 19.

S&P Global Ratings said Ofwat’s action indicated “material deficiencies in SWSF's management and governance policies and general risk in the management framework.”

The agency said Ofwat’s findings against Southern Water’s indicated “a material weakness in management and governance, in our view.” It went on: “We consider they have an adverse impact on the company's reputation, regulatory risk, its credit metrics, and its overall credit quality, particularly within a broader environment of higher political and regulatory risks.”