Fitch warns sector faces continued pressure from "most challenging price control"
Despite stable outlooks at three quarters of the UK water companies Rating agency Fitch has warned that sector credit ratings remain under pressure from the “enormous challenge” arising from the pandemic, the impact of low inflation on gearing and “the most challenging price control since privatisation.”
In a research note Fitch warned that the credit profiles of water companies were stretched by the their financial covenants and sensitivities to negative rating changes to the point where they had “limited headroom” to cash lock ups. Fitch reported that a second national lockdown or extended local lockdowns could trigger lock ups for some firms in the current financial year.
Fitch said of all UK water companies rated by the agency , the ratings for Southern Water, Thames parent Kemble; Anglian parent, Osprey; Anglian Water; and Yorkshire Water were the most vulnerable. This is because their capacity to maintain their assets and service debt and were close to their negative rating sensitivities, while their gearing headroom was limited.
Osprey’s and Kemble’s complete reliance on dividends from their underlying operating companies. left them exposed to fluctuating cash flows. That was down Anglian’s and Thames’ “relatively low” safety margins in measures that determine their capacity to distribute dividends.
Fitch reported that the “uncertain size of any penalty” to follow an ongoing Environment Agency probe into Southern’s historic breaches of wastewater disposal regulations hang over the company’s credit profile
And as appellants to the Competition and Markets Authority over their PR19 final determinations the credit profiles of Anglian and Yorkshire “could be greatly affected by the outcome of the appeal” either negatively or positively. “Neither company has any headroom left at its rating level,” said Fitch adding: “Totex and outcome delivery incentives performance will be critical for these companies’ credit ratings in AMP7 as they have limited ability to further reduce dividends due to the need to service debt at holding company levels.”