Moody’s downgrades Thames following Draft Determination and year-end results

Moody's downgraded Thames Water’s credit ratings last week, citing Ofwat’s PR24 Draft Determination (DD) and Thames’ end-of-year results.

It downgraded to Ba2 from Baa3 the long-term corporate family rating (CFR) of Thames Water Utilities Ltd (Thames Water). Concurrently, it assigned a probability of default rating of Ba3-PD. Moody’s also downgraded the backed senior secured debt ratings of Thames Water's guaranteed finance subsidiary Thames Water Utilities Finance Plc (TWUF) to Ba1 from Baa2 and its backed subordinated debt ratings to B3 from Ba3. The outlook remained negative.

Explaining its actions, Moody’s highlighted the following:

DD: allowed return of 3.66% for wholesale activities, below Thames’ business plan assumptions of 4.25%; ‘Inadequate’ BP rating, incurring a £141m penalty; 22% totex cost challenge; challenging targets and heightened incentives, exposing Thames to £80-90m a year of penalties.

Year-end results, published in July: breach of forecast trigger event financial ratios for March 2025 and weakening liquidity (sufficient to run until May 2025). Moody’s said the liquidity runway could be extended through cost savings or lower investment, but the latter was constrained by regulatory requirements and Thames’ turnaround plan. If no new equity is sourced before the FDs, raising additional debt may be the only liquidity extension option – however a forecast breach in trigger event financial ratios would require creditor consent for debt, which will in turn depend on “management being able to provide a credible pathway towards raising new equity”. But: “In light of a challenging draft determination, as published by Ofwat on 11 July 2024, we see elevated risk that existing or future equity investors may view the proposed risk and return profile as not sufficiently attractive to provide the sizeable equity requirement of at least £2.5bn under Thames Water's current business plan and likely more in the context of the proposed determination.”

Other: risk of Ofwat imposing a penalty for a dividend policy licence breach and risk from regulatory wastewater investigations (both ongoing).

• Moody’s assigned a first time rating of Baa1 to South West Water and a (P) Baa1 rating to the backed £2.5bn senior unsecured Euro Medium Term Note programme of South West Water Finance. The outlook on both companies was negative. Among other factors, the agency said the ratings reflected SWW’s low monopoly risk, moderate leverage (70%), good access to equity capital, PR24 business plan reward (0.3% of regulatory equity, £36m) and relatively modest PR24 totex gap (7% for SWW and newly acquired SES combined). On the negative side are high levels of pollutions and related performance penalties; stretching demands and potential penalties on this for AMP8 (an 80% cut in pollutions – a larger reduction than for any other company); and multiple regulatory investigations including on wastewater compliance and the Brixham crypto outbreak.