UK’s Thames Water’s troubles mount as credit rating cut to junk

Britain’s largest water provider Thames Water suffered a blow in its battle to avoid renationalisation on Wednesday as credit rating firm Moody’s downgraded its corporate family rating (CFR) and its safest tranche of debt to junk.

The heavily indebted utility is at the centre of a crisis in Britain’s water sector over the amount of sewage dumped in its rivers and seas and a crumbling pipe network.

Moody’s downgraded Thames Water’s CFR to Ba2 – two rungs into ‘junk’ rating territory – from Baa3, which is an investment grade and something water firms are supposed to maintain as part of their licence requirements.

It safest tranche of debt known as senior secured “Class A” bonds were cut to Ba1, which is one notch into junk, while its riskier “Class B” bonds were dumped five notches lower at B3.

Moody’s said the downgrade followed this month’s provisional ruling from British regulator Ofwat that Thames would not be allowed to raise prices as much as it had requested, and because of its “weakening liquidity position”.

In a statement, Thames, which provides water to roughly a fifth of British households and has around 18 billion pounds ($23.25 billion) of debt, said it was still working with regulator Ofwat and seeking new equity funding to shore up its finances.

“Increasing our financial resilience and securing an investible PR24 (price increase) determination is a critical priority for the business,” the company said, adding that it is business as usual in the meantime.

Analysts however are increasingly convinced the new government will have to step in.

“Almost certainly it will mean special administration for the company,” Seaport credit analyst Satish Pulle said, adding that the downgrade had not come as a surprise.