S&P downgrades South East Water debt

(by Karma Loveday)

S&P has downgraded South East Water (SEW) debt to BB+ from BBB-, with negative outlook. At the same time, the ratings agency revised its standalone credit profile on SEW down to bb from bb+ and assigned a recovery rating of ‘3’ to SEW's debt, reflecting its expectation of 65% recovery in the event of a default.

S&P explained that SEW’s weak operational performance, caused by supply interruptions, has materially worsened its profitability, despite strong revenue growth of 23% from price increases. It pointed out: "The main reason for the decline in profitability was £54.7m of incident-related costs, which include compensation payments, bottled-water distribution, tankering costs, and operational responses.”

While the recent £30.5m undertakings and redress package agreed with Ofwat could reduce the probability of recurrent customer-service failures by improving SEW's planning, monitoring, and operational readiness, the company’s liquidity position is tight. S&P said SEW is expected to raise additional debt in the coming months to finance its capital programme. On 24 July, the company announced it had agreed terms for a £200m liquidity backstop to support an upcoming bond issuance. But this cannot be drawn until the first quarter of 2027, leaving limited flexibility until the company successfully accesses capital markets.

S&P also observed: “SEW's 2025/2026 annual results and the findings from Ofwat's enforcement cases lead us to believe that SEW no longer operates at the higher end of the strong business risk profile category.”