Moody’s downgrades Severn Trent after it accepts Ofwat's final determination

Ratings agency Moody’s has downgraded to Baa1 from A3 the issuer rating of Severn Trent Water as well as the senior unsecured debt ratings of Severn Trent Water Utilities Finance. It also downgraded to Baa2 from Baa1 the issuer and senior unsecured debt ratings of Severn Trent, giving all ratings a stable outlook.

This followed the Severn Trent board formally accepting Ofwat’s final determination for PR19 on 28 January and announcing that its dividend policy for AMP7 will be growth of at least CPIH.

Moody’s explained: “The downgrades take into account:

• Severn Trent Water's exposure to a significant cut in allowed wholesale returns to ca. 2.42% real in cash terms from April 2020 on a 50:50 blended inflation basis, compared with 3.6% in the current period;

• challenging sector-wide performance targets, which could lead to financial penalties for Severn Trent Water, although the company will be able to offset these with rewards received in the current period and carried into AMP7; and

• the group's updated dividend policy. Specifically, the rating actions reflect Moody’s expectation that key financial metrics will fall outside the boundaries for the previous A3 and Baa1 ratings for the operating and holding company, respectively, for the entirety of AMP7.”