Thames Water is facing a debt pile of £15.2 billion in the year to March, after its parent company pulled £500 million in interest payments, due at the end of April. As a result, Thames Water had defaulted on some of its debts, heightening concerns of its survival.
Adding to its financial pressures is the downgrade, announced by Moody’s on Thursday.
The agency dropped Thames Water’s credit rating from Baa3–under which the company’s obligations are subject to moderate credit risk–to Ba2, also known as a ‘junk’ rating.
Ofwat Rejection
Thames Water shareholders include those led by the Canadian pension scheme Omers and USS and the UK universities retirement fund. Their decision against extending a £500 million financial lifeline to Thames Water comes after Ofwat rejected the firm’s five-year business plan.The water provider sought to increase bills for customers by 44 percent over the next five years, a proposal that has also been rejected by Ofwat.
In light of Ofwat’s “challenging” draft determination, said Moody’s, investors may not find the business “sufficiently attractive.” Thames Water may struggle to secure an equity requirement of at least £2.5 billion under its current business plan, said the agency.
Thames Water leadership believes that “with the right time, money and resources” the business can be turned around.
“Management is engaging with investors and its creditors and remains committed to seeking new equity funding and exploring all options to extend its liquidity runway,” the company’s official statement said.
Ofwat’s draft verdict kicked off six months of negotiations with Thames Water, with the final decision by the regulator expected in December.
Thames Water said that securing an investible determination was a critical priority for the business.
Pollution and Penalties
In the past several years, Thames Water has been part of a nationwide pollution scandal that has uncovered poor environmental records by water companies. Thames Water has been found to pump raw sewage into waterways.Thames Water is under extensive investigation by Ofwat, after the regulator opened an enforcement case against the company in 2022 over its environmental performance and waste spills.
Moody’s has estimated that Thames Water could be exposed to sizeable penalties, linked to pollution and sewer flooding.
Ofwat’s “challenging” targets for the company related to customer service and asset health could lead to at least £80-90 million in fines, said the credit agency. In addition, Thames Water could be hit with penalties up to £20 million per year for “weak service provision.”
Looking ahead, the agency said it doesn’t “envisage upward pressure on Thames Water’s ratings.”
In order to upgrade its ratings, the water provider needs to improve its operational performance and secure a significant equity injection, Moody’s said.