Southern keeps investment grade rating on debt with negative outlook

Spurred by Southern Water’s recent decision to stall dividend payments, Fitch Ratings has affirmed a medium investment grade rating for Southern Water’s senior debt with a Negative Outlook.

Fitch has affirmed its BBB+ rating on senior secured debt raised by Southern’s finance arm Southern water Services Finance reporting the rating reflects its expectation that the operating company “could maintain its financial profile within our negative rating sensitivity, supported by its recent announcement that it does not intend to pay dividends unless the company is financially resilient.”

Fitch said the Negative Outlook reflected an update of “tighter” regulatory price determinations, Southern’s “weaker-than-expected total expenditure performance during the previous price control” and greater working capital demands arising form the pandemic. Fitch said it could improve the outlook to Stable “if SWS generates greater financial headroom against its negative rating sensitivities.”

The agency assigned a “borderline” rating on Southern’s financial profile with its estimate for the firm’s gearing – at 75% – stronger than its 77% boundary for a negative outlook but interest coverage at 1.5% weaker than Fitch’s 1.6% sensitivity for a negative rating.