Moody’s Ratings has downgraded Thames Water Utilities Ltd. to Ba2 from Baa3, citing growing financial vulnerabilities and regulatory challenges. This move, which includes a negative outlook, underscores the company’s escalating difficulties as it grapples with liquidity concerns and stringent demands from the Water Services Regulation Authority (Ofwat).
The downgrade affects both Thames Water's long-term corporate family rating and the debt ratings of its finance subsidiary, Thames Water Utilities Finance Plc. The senior secured debt rating was reduced to Ba1 from Baa2, while subordinated debt dropped to B3 from Ba3. This follows Ofwat’s draft determination for the upcoming five-year regulatory period, starting in April 2025, which has imposed a rigorous oversight regime on Thames Water.
Moody’s decision reflects Thames Water's deteriorating liquidity position, highlighted in its financial results for the year ending March 2024. Despite holding £1.3 billion in cash and equivalents, and £1.2 billion in undrawn credit facilities, the company foresees liquidity strain beyond May 2025 unless it raises new equity or debt. The draft determination poses additional challenges, demanding substantial operational and financial improvements.
Ofwat’s draft determination includes an allowed return of 3.66% for wholesale activities, falling short of Thames Water’s 4.25% target. The regulator also proposed a 22% cost reduction compared to the company’s expenditure plans, posing significant hurdles to Thames Water’s financial strategies. Additionally, the company faces potential penalties averaging £80-90 million annually if it fails to meet stringent environmental and service targets, highlights Moody’s.
The regulatory pressure is compounded by ongoing investigations into Thames Water’s wastewater treatment compliance by Ofwat and the Environment Agency. Potential fines and civil penalties could exacerbate the company's financial woes, with up to £90 million in fines from Ofwat alone.
In response to the downgrade, Thames Water acknowledged the ratings change and reiterated its commitment to securing new equity funding and exploring options to bolster liquidity. The company emphasized its dedication to maintaining service continuity and progressing its turnaround plan.
Despite these assurances, the path forward remains fraught with challenges. The draft determination’s tough stance, combined with Thames Water’s existing financial strains, casts doubt on its ability to attract the necessary investment. Without a credible plan to raise new equity, the company risks further downgrades and financial instability.
