Moody’s warns returns could fall again in AMP8

Water companies could face a fall in like-for-like returns of up to 80 basis points in AMP8, Moody’s has estimated.

The ratings agency modelled two scenarios, one based on gilt-implied forward rates and the other on its own macroeconomic assumptions updated in August 2021. The range of estimated AMP8 returns ranged from 10 bps above Ofwat's allowance for PR19 on a like-for-like basis, to up to 80 bps lower.

Moody’s warned lower allowed returns would weigh on companies’ credit quality and metrics across the sector, in particular its adjusted interest coverage ratio (AICR). However it added that companies with long-dated expensive debt, higher gearing or poor performance would be most exposed. The estimates were presented in a research note, published last week.

Moody’s added it expected Ofwat to move to full CPIH indexation for AMP8, and that this would boost cash returns and company cash flow. Moreover: “The regulator has also signalled that it may increase — from 33% currently — the proportion of inflation-linked debt that it assumes in testing financeability, which would improve the notional company's financial flexibility.”