Moody’s downgrades Kemble notes after interest payment missed

Moody’s Ratings last week downgraded from Ca to C the backed senior secured rating of the £400m medium term notes due in 2026, issued by Thames Water parent Kemble, following a missed scheduled interest payment on the notes on 20 May. While this was the first payment default on the rated instrument, it followed previous missed interest and principal payments on debt at Kemble in April.

Moody’s said that following an event of default, secured creditors of Kemble, including the bondholders, have the ability to take enforcement action, including the enforcement of a pledge over the shares in Thames Water, or agree to a debt restructuring. However, the ratings agency shared its belief that Kemble creditors are unlikely to take any action before there is greater clarity over the financial trajectory of Thames Water via the now delayed draft and subsequently final PR24 determinations.

Moody’s continued: “Kemble's consolidated leverage currently stands at around 90% of net debt to Thames Water's regulatory capital value (RCV). A Kemble debt restructuring or sale (following enforcement of the share pledge) at a substantial discount to the operating company's RCV could result in a material loss for Kemble lenders. In addition, the value of the Kemble security and the shares in Thames Water Limited may be limited if either the security granted under the operating company's financing arrangements were to be enforced… or the operating company became subject to a special administration process. The C rating on the notes reflects that they currently trade at a cash price in the single digits, which in turn indicates a very low expected recovery.”

Kemble's outlook was changed to stable from negative, reflecting the default and that any potential future restructuring process will take time to conclude.

In other Thames news last week: 

• The company poured cold water on media reports of a sickness bug in Beckenham’s water supply after residents raised the alarm. It confirmed there were no water quality failures from the Central Sydenham water zone.

• Reports in the financial press said a lender to Thames was trying to offload over £500m of loans and bonds, and that more board members had resigned. 

• Green party peer Baroness Jones of Moulsecoomb quizzed the Government on its plans should Thames or another water company fail, and advocated taking them back into public ownership. Responding for Defra, Lord Douglas-Miller did not reveal the details of any rescue strategy, except to reference the special administration regime and that it is companies’ responsibility in the first instance to continue to try to raise capital.