Fitch downgrades Thames' parent on debt and credit rating on PR19 and Covid risks

Fitch Ratings has downgraded by one notch the senior debt rating and the issuer default rating (IDR) of Thames Water’s holding company, Kemble Water Finance to reflect pressure on its financial profiles from Ofwat’s final determinations.

Fitch has also Removed Kemble from rating watch negative and revised its IDR outlook to negative in view of “uncertainty associated with the long-term impact of the coronavirus”. Were Thames to show “continued significant improvement in operational performance, resulting in lower overall outcome delivery incentive (ODI) penalties in AMP7” Fitch said its could review its outlook to stable. But a “materially negative” long-term impact of the coronavirus or a deterioration in operational performance could lead to a downgrade Fitch warned.

Among Fitch’s drivers for its rating for Kemble were risks to Thames’ dividend stream – Kemble chief source of cash flow – which included “operational underperformance,” low revenue growth, the possibility of Thames’ “inability to distribute dividends due to covenanted debt financing going into a lock up.”

Fitch assumed about ODI penalties of £174 million related to Thames’ operational performance, including C-Mex and D-Mex. It estimated that most of the penalties will come from customer satisfaction and supply interruptions, with only “modest penalties” for leakage given the 20% leakage reduction target and “the company's good progress to date.”

Fitch has forecast that a “sharp drop” in non-household consumption will be “somewhat offset” by growth in household consumption. A lower-than-allowed revenue in was possible in 2020 according to Fitch that recoverable with a two-year lag via a regulatory revenue correction mechanism.