Moody’s downgrades Thames Water’s credit rating to ‘junk’, cites weakening liquidity position

Thames Water, the UK’s largest water utility, has seen its credit rating slashed to junk status by Moody’s Ratings.

The downgrade comes after the UK’s water regulator placed the company under a turnaround oversight regime due to concerns about its financial stability.

This decision is expected to have significant implications for the utility’s debt management and future financial strategy.

Thames Water’s Class A debt downgraded to Ba1, class B to B3

Moody’s downgraded the senior secured debt of Thames Water Utilities Finance Plc to Ba1, one notch into junk territory.

The class B notes were downgraded even further to B3, and the corporate family rating was lowered to Ba2.

The company’s credit outlook remains negative. This marks a notable shift as Thames Water’s financial health deteriorates, raising concerns about its ability to manage its substantial debt burden of £16.5 billion.

Thames Water’s financial struggles and regulatory challenges

The downgrade threatens to put Thames Water in breach of its operating licence, which requires the company to maintain two investment-grade ratings.

The water utility’s “weakening liquidity position” and potential covenant breaches on its debt were key factors in Moody’s decision.

In addition, S&P Global Ratings has indicated it could also downgrade the utility’s safest class of bonds, which currently hold the lowest investment-grade rating.

Thames Water has been in discussions with the water regulator Ofwat since April 2024, alerting them to the possibility of credit rating downgrades.

The company has been working with Ofwat to maintain its financial resilience and avoid the government’s special administration regime (SAR), a form of temporary renationalisation that could be triggered if the company fails to meet its financial obligations or main duties.

Debt implications and investor concerns

The downgrade is expected to increase the cost of borrowing for Thames Water, which provides water and sewage services to approximately 16 million households.

This financial strain could hinder the company’s ability to attract new investors, especially as it seeks to raise £750 million in equity by next May and an additional £2.5 billion by 2030.

The company’s shareholders, which include pension funds such as Canada’s Omers, Britain’s USS universities scheme, and several sovereign-wealth funds, have expressed concerns about the viability of further investments.

In April, they labeled the business “uninvestable” and withdrew a previous commitment to invest an additional £500 million.

Future investment challenges and regulatory limits

Thames Water’s efforts to secure new investment might be further complicated by Ofwat’s limitations on potential bill increases for consumers.

While water companies in the UK have requested an average increase of 33%, Ofwat’s draft ruling earlier this month proposed increases of only about a fifth. This discrepancy could deter potential investors looking for higher returns.

Moody’s highlighted that without a fresh equity injection, Thames Water is forecasted to breach its trigger event financial ratios, necessitating approval from bondholders to borrow more money.

The financing model used by Thames Water, which prioritizes cash flows to service different tiers of debt, has led to higher investment-grade ratings for top-ranked bonds compared to standard corporate bonds with similar debt levels.

Market reaction and broader financial implications

Some of Thames Water’s class A bonds are currently trading at less than 70p in the pound, indicating that even top-ranking bondholders are preparing for significant financial losses. Class B bonds are quoted at just a quarter of their face value.

On top of the £16.5 billion debt at Thames Water’s regulated utility, the parent company, Kemble Water, has additional borrowings, bringing the group’s overall debt to over £18 billion.

Bonds at Kemble Water are already in default, with investors braced for near-total losses.

Government response and accountability measures

UK Prime Minister Sir Keir Starmer addressed the House of Commons on Wednesday, stating that the government would meet with the leaders of failing water companies to hold them accountable for their performance.

Customers should not pay the price for mismanagement by water companies and we’ve already announced steps to put water companies under a tougher regime.

As Thames Water navigates these financial and regulatory challenges, the company’s ability to stabilize its finances and maintain service quality will be closely watched by investors, regulators, and consumers alike.

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