Moody's downgrades Thames’ Class A senior debt ratings to Ca

(by Verity Mitchell)

Moody's Ratings has downgraded Thames Water Utilities Finance's Class A backed senior secured debt ratings to Ca from Caa3, and backed senior secured MTN programme rating to (P)Ca from (P)Caa3.

The one notch downgrade reflected that Moody’s now expects lower recovery rates for Class A creditors, compared to its previous assumptions – primarily driven by the Government's response to the London & Valley Water consortium's revised recapitalisation proposal.

The proposal includes: £3.35bn of new equity; £6.55bn of new debt facilities; £20.4bn of totex expenditure during the AMP8 regulatory period; a 30% haircut to Class A debt and a write-off of Class B debt; and a package of regulatory protections against downside risk including an enhanced asymmetric Aggregate Sharing Mechanism and an upfront redress payment in exchange for removal of Outcome Delivery Incentives during AMP8.

On 16 June, environment secretary Emma Reynolds wrote to Ofwat saying: "The Proposal expects consumers to fund an unprecedented level of regulatory adjustments... I am not yet convinced that the proposal demonstrates sufficient protection for consumers' interests". The current proposal’s 30% haircut was close to the maximum 35% expected loss for the previous Caa3 rating level. The Government's intervention suggests that creditors may now face a larger haircut. The revised Ca Class A debt rating corresponds to an expected loss of between 35% and 65%. Thames Water's stable outlook reflects that the expected recovery rates for the various seniorities of creditors are unlikely to change in the near term.

On 29 June 2026, Thames launched its 12th set of consent requests which, if approved, would allow the company to draw the final £213m available under the super senior facilities' first accordion tranche of £823m. Under the company's own cashflow forecast, the drawdown would be fully spent by the week commencing 21 September 2026.

The restructuring plan envisioned a total £1.5bn accordion facility, albeit Thames Water has not currently fulfilled the conditions to access the residual £677m tranche and would require new commitments and further waivers from the creditors to draw upon it. Thames Water can also, subject to the relevant creditor approval, access £73m from the original super senior facility which was previously deferred during the appeal period. These waivers are expected to be forthcoming, given that the creditors have waived all unmet conditions to date. At the company's current run-rate, it is forecast that the second tranche would be fully utilised by the end of November 2026, after which funding becomes more uncertain.

Thames Water's ratings could be downgraded if creditors incur more significant losses than embedded within current ratings, or if the priority of claims is not expected to be respected under a Special Administration scenario.

Reynolds has continued to say, most recently at her appearance at Parliament's Environment, Food and Rural Affairs Select Committee hearing on 7 July, that Thames Water has not met the criteria to trigger the Special Administration Regime, either on an insolvency or performance-related basis.

Uncertainty remains on both her continued role as the secretary of state under the likely new prime minister Andy Burnham, and his views on the current ‘market solution’ the Government envisages for Thames.