Equity injections critical for struggling Thames, Fitch warns

Fitch Ratings has warned that shareholders’ propensity to provide equity to Thames Water will be a key ratings driver for holding company Kemble Water Finance. It called Kemble “the most vulnerable rated holding company in the UK water sector”.

Fitch explained that the £750m conditional equity package recently announced by Thames’ owners is dependent on a business plan that underpins a turnaround, together with appropriate risk-and-return for 2025-30 price control period. It commented: “Fitch sees high execution risk around TWUL’s more focused turnaround plan, which prioritises a lower number of initiatives now. The turnaround plan should mitigate the impact of higher costs, tightening regulation and refinancing risk.”

After 2025, shareholders have noted the need for £2.5bn of shareholder support during AMP8, but that too remains conditional. Fitch said: “We expect it will mainly depend on the following: the risk-and-return for AMP8 as defined by the regulator; the AMP8 business plan (approved by the board); and maintaining progress on the turnaround plan, with improvement in operational and environmental performance, while taking mitigating measures to avoid trigger events.”

In a new report on Kemble, Fitch set out the different hypothetical scenarios the company may face and how investors might be affected: base case, trigger events, an event of default leading to a standstill, the special administration regime and re-nationalisation.

The agency is running its activities under a base case and does not expect liquidity tensions for Thames or Kemble in financial year ending March 2024. However, it said liquidity and refinancing risks for Kemble are key concerns for FY25 and beyond.