Thames Water suffers two more credit downgrades due to liquidity shortage
- Top category debt downgraded to CCC+ – one of the worst ‘junk’ ratings
- Moody’s warns liquidity could dry up in December without access to reserves
Thames Water has faced two further downgrades to its credit rating after the utility was reluctantly returned to investors and creditors’ hands again last week.
S&P Global Ratings and Moody’s both downgraded their ratings on Thames’ £16 billion of prime debt on Wednesday evening, after the group warned the company could run out of liquidity if creditors do not allow it to access its financing reserves.
Both agencies downgraded their ratings to the equivalent of CCC+, one of the lowest levels of “junk.”
Thames, which serves 15 million homes in London and the south-east of England, is facing a funding crisis, with the company on the brink of emergency nationalisation and weighed down by a heavy debt burden.
Downgraded: Thames Water calls on investors and creditors over liquidity issues
Moody’s said the liquidity position was “significantly tighter than expected”, referring to Thames’ warning last week.
S&P also said the statement was “contrary” to its view of Thames’ liquidity, as the company assessed the utility’s “management and governance as negative”.
It warned that this “indicates the company will run out of cash by December 2024” unless creditors allow the group to draw on its reserves, “instead of the company’s previously stated liquidity limit until May 2025”.
The agency, which downgraded Thames for the second time in three months, said this would likely lead to a “necessary exchange”, where creditors agree to change or extend the terms, resulting in a loss against the original agreement.
It added: ‘In the medium term, the inability to raise new equity could ultimately lead to a creditor-led debt restructuring or a restructuring imposed as part of a special administration, should the company meet the criteria for special administration.’
When Thames lost its mandatory two investment grade credit ratings in July, it breached its licence.
Instead of enforcement action, the industry regulator Ofwat said the company could proceed with a series of “commitments” designed to encourage credit rating agencies Recovery of investment grade status.
Ofwat is expected to publish the final tariff statement, which will determine how much water companies can charge their customers, in December 2024 or January 2025.
Thames Water has asked the regulator to allow household bills to rise by £18.99 a month, or 52 per cent, by 2030. However, Ofwat’s draft decision states that bills can only be increased by 23 per cent over the next five years.
While Thames Water has the option to appeal, Moody’s warned that if the final decision “does not deviate materially” from the “rigorous” design, the group could struggle to attract new investors.
Moody’s said: ‘If the company is unable to raise new equity, this could ultimately lead to a creditor-led debt restructuring or a restructuring imposed as part of a special administration, should the company meet the criteria for a special administration.
The outlook for Thames Water remains negative, reflecting the risk that potential losses to creditors following a default could be higher than reflected in current ratings.
“It is unlikely that ratings will rise in the near term.”
A Thames Water spokesman said in a statement: “The rating agencies’ announcement is consistent with our liquidity position as set out in our market statement last Friday.
‘We remain committed to the commitments we made with our regulator in July 2024, after downgrading our Class A debt rating to sub-investment grade. We also continue to engage with creditors to consider options to extend our liquidity headroom.
‘Formal discussions with potential investors will begin in the coming weeks.’
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