S&P Downgrades Cash-Strapped Thames Water to ‘Junk’ Status

The Thames Water logo is seen on protective fencing around a pipework replacement site in London on April 4, 2024. (Leon Neal/Getty Images)

S&P Global Ratings has downgraded the credit rating of the UK’s biggest water supplier Thames Water to “junk” status and warned that the firm’s liquidity problems were unlikely to improve in the near term.

Last week, Moody’s Ratings in a similar move downgraded the company’s credit rating, making it harder and more expensive for Thames Water to borrow money.

S&P’s announcement on Wednesday questioned the company’s ability to cover its liquidity needs before the autumn of 2024.

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.

In July, water industry regulator Ofwat said it will impose a “turnaround oversight regime” on Thames Water and opposed the utility firm’s planned 44 percent rise in consumer bills over the next five years.

While the company’s leadership believes that the business can be turned around, S&P said it doesn’t expect Thames Water’s liquidity position to improve in the near term. The credit agency also assumes that this is unlikely to be completed before Ofwat’s final determination, expected in December.

“We therefore lowered our issue ratings on the class A and class B debt to ‘BB’ and ‘B,’ respectively, from ‘BBB-’ and ‘BB’ previously,” S&P said in a statement.

The ‘BB’ rating is two notches below investment grade, while the Class B debt rating of ‘B’ lands Thames Water in the ‘junk’ territory.

License and Nationalisation

The agency also said that Thames Water is in breach of its operating license after it failed to maintain investment-grade ratings from two ratings companies, a requirement by Ofwat. Discussions over this matter with the regulator are ongoing.

Responding to S&P’s ratings action, Thames Water said on Wednesday that it “noted” the downgrades and their negative outlook.

The company added that it continues to work with Ofwat to maintain financial resilience and is engaging with investors and its creditors to secure new equity funding.

“In the meantime, it’s business as usual for our customers and our teams on the ground who will continue to supply our services and remain focused on the delivery of our turnaround plan,” Thames Water said.

Under the company’s current business plan, it may struggle to secure an equity requirement of at least £2.5 billion, Moody’s has warned.

If Thames Water were to go bust, contingency plans drawn by the former government, dubbed “Project Timber,” could see the company nationalised. However, the new Labour leadership has said that there is no programme of nationalisation for the water industry.