Moody's Investors Service has downgraded to Baa2 from Baa1 the Corporate Family Rating of Thames Water Utilities. It has also downgraded Thames Water Utilities Finance's senior secured debt rating to Baa1 from A3 and its subordinated (Class B) debt rating to Ba1 from Baa3. The outlook on the ratings is stable.
And the ratings agency has confirmed the B1 senior secured rating of Thames Water (Kemble) Finance. The outlook on the rating is stable. Kemble Water is the financing subsidiary of Kemble Water Finance, which owns Thames Water through intermediate holding companies.
Moody's said the Thames Water Utilities corporate rating was constrained by "relatively high"
leverage,past "weak operational performance and associated penalties, and regulatory and financing decisions that weaken creditor protection by adding headroom to Thames Water's dividend lock-up covenants in AMP7.
Moody's said the Thames Water Utilities rating actions take into account:
the "significant" real terms cash cut in allowed wholesale returns from 3.6% under AMP6 to 2.42% following the company's acceptance of Ofwat's final determinations on PR19;
"material revenue reductions as a result of operational underperformance in AMP6";
"challenging performance targets in AMP7" that Moody's expects to result in further financial penalties, an
evidence of "credit negative changes to financial policy," in Thames' RPI-linked debt and
swap restructurings which, according to Moody's, "weaken the effectiveness of Thame Utilities 'Water's covenants."
Moody's said it expected the company to have an adjusted interest coverage ratio of around 1.3x over AMP7 and leverage above 80% – weaker than Moody's revised guidance of at least 1.4x and no more than 80% for these ratios to achieve a Baa1 corporate family rating.
Positives, according to Moody's, included:
the stable cash flow as a monopoly provider in a transparent and predictable regulatory regime;
"additional creditor protection for event risk and enhance recovery;
prospects in an event of default," arising from debt features, including distribution lock-up covenants and dedicated liquidity; and
"lower average cost of debt and less risk in relation to derivative contracts than highly-leveraged peers."