Moody’s confirms negative outlook for water is from PR19 rather than Covid 19

Water companies have low exposure to the impact of the coronavirus, but remain exposed to PR19 pressures, Moody’s said last week as it confirmed its outlook for the sector remains negative.

The 50% cut in returns set by Ofwat in December, while reflecting a persistent low yield environment, will pose particular problems for companies with expensive long-dated debt, the agency reported. Its chart (below) shows Moody’s expects most companies to have a nominal cost of debt above the notional allowance.

“Financial flexibility will be eroded across the sector, with particular pressure on interest coverage, and companies will have limited room to offset unforeseen challenges,” explained Stefanie Voelz, VP and senior credit officer.

Moreover, Moody’s said the regulator has allowed “roughly 26% less enhancement spending than the companies requested” for 2020-25 “with the most significant cuts on proposals to increase resilience”. And it calculated the sector “could still rack up stiff penalties of £150m-£350m in aggregate over the five years” despite Ofwat’s concessions on performance targets in December.

Moody’s noted Competition and Markets Authority is dealing with the largest number of referrals since privatisation.