Moody's Investors Service has downgraded to B2 from B1 the backed senior secured rating of the GBP400 million medium term notes due 2026, issued by Thames Water (Kemble) Finance PLC (Kemble). The outlook remains negative.
Moody's Investors Service has downgraded to B2 from B1 the backed senior secured rating of the GBP400 million medium term notes due 2026, issued by Thames Water (Kemble) Finance PLC (Kemble). The outlook remains negative.
The rating action on Kemble follows a decision by Ofwat announced on 20 March 2023 to modify the regulatory ring-fencing conditions in the licences of the water companies in England and Wales and increased scrutiny of the financial resilience of Kemble's core operating subsidiary Thames after the sudden resignation of former CEO Sarah Bentley in June.
Moody's said its rating action reflects the view that:
- risk of a dividend block at Thames Water increased with heightened scrutiny of Thames Water's financial resilience;
- these factors will weigh on lender appetite in the context of Kemble's forthcoming refinancing needs, likely to the detriment of the availability and cost of capital for the holding company;
- while shareholders have reiterated their support for Thames Water, further equity injections are subject to conditions and may fall short of what is needed to underpin the credit quality of the holding company in the context of a challenging turnaround and heightened political and regulatory scrutiny.
According to the ratings agency, at least one environmental, social and governance (ESG) consideration was material to the credit rating action.
Moody’s said that regulatory scrutiny and social expectations that may have an adverse impact on a company's access to capital markets is a key social risk consideration under Moody's approach for assessing ESG risks.
Under current licence conditions, regulated water and wastewater companies may not pay dividends (or make similar distributions, including through upstream loans) without Ofwat's consent while their credit rating is Baa3 (or equivalent), with a negative outlook, or lower by any one credit ratings agency. The regulator has decided to raise this threshold to Baa2, negative from April 2025. The higher rating requirement will serve to trap cash at an earlier point as the credit quality of an operating water company deteriorates.
Moody’s said that Kemble's credit quality at the B2 rating level assumes continued shareholder support for the operating company, Thames Water, and additional equity injections to improve its operational and financial performance.
The ratings outlook assigned by Moody’s is negative, reflecting:
- the increased risk of a distribution block being triggered under Thames Water's licence and ultimately also its debt documentation
- uncertainty around the successful execution of the turn-around programme
- Kemble's ability to meet its forthcoming refinancing needs without a significant increase in its funding costs over time.
Kemble's rating could be further downgraded if the ratings of Thames Water were downgraded, or the risk of a dividend lock up at the operating company was not reduced, absent additional liquidity at the holding company to increase its resilience to dividend blocks.
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