Moody’s Ratings has lowered Thames Water Utilities Ltd.’s rating to Ba2 from Baa3, citing increasing financial vulnerabilities and regulatory hurdles. This downgrade, accompanied by a negative outlook, highlights the company’s mounting challenges as it faces liquidity issues and strict requirements from the Water Services Regulation Authority (Ofwat).
The downgrade impacts both Thames Water’s long-term corporate family rating and the ratings of its finance subsidiary, Thames Water Utilities Finance Plc.
The senior secured debt rating was decreased to Ba1 from Baa2, while subordinated debt fell to B3 from Ba3. This follows Ofwat’s draft determination for the next five-year regulatory period, commencing in April 2025, which has established a stringent oversight framework for Thames Water.
Moody’s action reflects Thames Water’s declining liquidity situation, as indicated in its financial results for the year ending March 2024.
Although the company has £1.3 billion in cash and equivalents and £1.2 billion in undrawn credit facilities, it anticipates liquidity pressures beyond May 2025 unless it secures new equity or debt. The draft determination introduces further challenges, requiring significant operational and financial enhancements.
Ofwat’s draft determination allows a return of 3.66% for wholesale activities, which is below Thames Water’s target of 4.25%.
The regulator also suggested a 22% reduction in costs compared to the company’s spending plans, presenting considerable obstacles to Thames Water’s financial strategies. Moreover, the company could face potential penalties averaging £80-90 million annually if it does not meet strict environmental and service targets, according to Moody’s.
The regulatory pressure is intensified by ongoing investigations into Thames Water’s wastewater treatment compliance by Ofwat and the Environment Agency. Possible fines and civil penalties could worsen the company’s financial situation, with potential fines from Ofwat alone reaching up to £90 million.
In reaction to the downgrade, Thames Water recognized the ratings change and reaffirmed its commitment to securing new equity funding while exploring options to enhance liquidity. The company stressed its focus on maintaining service continuity and advancing its turnaround strategy.
Despite these commitments, the road ahead is laden with challenges. The draft determination’s stringent conditions, coupled with Thames Water’s current financial difficulties, raises concerns about its ability to attract necessary investment. Without a viable plan to raise new equity, the company risks further downgrades and financial instability.
Source :Moody’s Ratings
