Moody's lowers credit outlook for Northumbrian Water

Ratings agency Moody’s has changed its outlook for Northumbrian Water’s long-term credit rating to negative to reflect “continued uncertainty over Northumbrian's revenues out to 2025 “as a result of its ongoing appeal of Ofwat’s final determination for AMP7.”

Moody’s said the shift to a negative outlook followed decisions by major shareholders in Northumbrian’s parent, NWG, convert more than £1bn in outstanding loans and interest to equity. The outlook applies to Northumbrian Water’s Baa1 long-term issuer rating and the Baa1 senior unsecured debt ratings of Northumbrian Water Finance.

On December Northumbrian shareholders, CK Infrastructure Holdings, CK Hutchison Holdings and Li Ka Shing Foundation t outstanding shareholder loans of £1.03 in and some £120 million of accrued interest to new equity.

The move reduced NWG’s gearing – net debt to regulatory capital value (RCV) – by about 23 percentage points for March 2021 from 103% as of March 2020 according to Moody’s. The consequent cancellation of interest payments at 11% also improved Northumbrian’s interest cover.

“Northumbrian's rating continues to be constrained by the credit quality of NWG because regulatory ring-fencing provisions provide only limited insulation from the credit quality of its parent. As a result, improved credit metrics at NWG are supportive of Northumbrian's rating,” said Moody’s

Nevertheless Moody’s pointed out that Northumbrian's revenues will continue to be based on Ofwat's PR19 determination until the Competition and Markets Authority (CMA) issues its determination on Northumbrian’s appeal scheduled for February 2021. So Moody’s said credit metrics at Northumbrian will be below the agency's guidance for the current rating in 2020-21 and 2021-22 even after conversion of the shareholder loans.

“If the CMA's final decision includes an allowed return close to Ofwat's view, credit metrics are likely to remain weakly positioned for the remainder of AMP7,: Moody’s warned. But were the CMA determination to remain in line with its provisional findings, Moody's expects, “Northumbrian will be able to achieve credit metrics consistent with

the current rating.”