Fitch warns of ratings pressure if C-19 revenue hit is not recovered medium term

The fallout from the coronavirus – including delayed customer payments, increased bad debts and modified consumption volumes – will temporarily reduce cash flow, liquidity and covenant headroom for UK water companies in FY21, according to Fitch Ratings analysis.

The ratings agency added short-term cash-flow pressure will further erode rating headroom, which is already limited for companies with Negative Outlooks, including Southern Water, Yorkshire Water, Osprey Acquisitions (Anglian Water's holding company), and Kemble Water (Thames Water's holding company).

The non household retail market is the chief concern at present, following Ofwat’s decision to allow retailers to defer up to half the wholesale charges they owe between March and May. Fitch said “NHH customers' contribution to water companies' revenue varies between 20% and 30%, so the code change creates a maximum exposure of about 2.5%-3.8% of annual revenue. If the code change is extended to support the business retail market further [now being consulted on], the water companies' exposure could increase significantly.”

Fitch said it expected the water sector to cope with the short-term cash-flow pressures “reasonably well. Most of the companies have sufficient liquidity to cover their needs in the next 12-18 months”. However: “If the companies are not able to recover revenue in the medium term, their ratings could come under further pressure. For example, a significant increase in household bad debts or a transfer of some excess credit loss from non household retailers to wholesalers could be credit-negative.”