Moody's upgrades bond financing Scottish Water wastewater asset project

Moody's Investors Service has upgraded to A3 from Baa1 the underlying rating of a £102.9m bond due September 2026 issued by Stirling Water Seafield Finance to finance the upgrade, operation and maintenance of Scottish Water wastewater assets near Edinburgh. The outlook has been changed to stable from positive.

The issuer is a special-purpose vehicle formed in 1999 to raise finance for Stirling Water Seafield which entered into a 30-year concession agreement with the then East of Scotland Water Authority, now Scottish Water, on a project to upgrade, operate and maintain wastewater treatment facilities covering the Almond Valley, Seafield and Esk Valley catchment areas near the Scottish capital.

Moody’s said the upgrade followed “continued strong operational performance at the project, with minimal deductions since 2010-11”. The credit agency reported outturn wastewater treatment flows at 3.4% below the volume cap in 2022-23 following a hot and dry summer. But it said the banding structure of revenues meant the project still received over 99% of its maximum allowed revenue. And Moody's saw a diminishing risk from exposure to volume risk.

The underlying rating reflected the high operational gearing of the project which ups its vulnerability to unpredicted stress and the risks associated with the complexity of the assets. But positives included:

• a long term Private Finance Initiative concession agreement with Scottish Water for the provision of wastewater treatment facilities and services in the Edinburgh region;

• a stable revenue stream with limited volume risk;

• the capability and experience of Veolia Water Outsourcing as the operator of the project; and

• structural features which mitigate the risks of high leverage.