Moody’s decision increases chances of government-organised administration
Thursday July 25 2024, 12.01am BST, The Times
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Thames Water suffered a setback in its efforts to avoid a government-organised administration when an influential ratings agency downgraded its bonds to junk status, putting it in breach of its operating licence.
Moody’s, one of the three big worldwide ratings agencies, issued a new rating on bonds issued by Thames Water Utilities, one of the water and sewerage company’s main operating entities. It rated its bond “family” at BA2, a junk grade, down from the previous BAA3, the lowest investment grade.
Industry sources said the move increased the chances of Thames, which has 16 million customers across London and the southeast, eventually being put into special administration, a type of insolvency in which a government-appointed body takes control while the company is restructured. The future of Thames, which has about £16 billion of debt, is one of the largest corporate challenges facing the new Labour government.
Thames’s licence specifically requires it to maintain an investment-grade rating from Moody’s. The water regulator Ofwat said it was considering its response, including the possibility of enforcement action, but noted that it had already announced a new financial monitoring regime for the company a fortnight ago.
Moody’s said it issued the downgrade in light of a draft determination by Ofwat of price increases over the next five years. Thames had asked for a 40 per cent hike, but the regulator said it was minded to allow only half that. Moody’s was also responding to Thames’s recent financial results, which “indicated its weakening liquidity position”.
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Thames said it had notified Ofwat of the likely downgrade in April, when Moody’s first signalled its intention to re-rate the bonds. It said it “continued to work with Ofwat to maintain the ongoing financial resilience of the business”.
“Management is engaging with investors and its creditors and remains committed to seeking new equity funding and exploring all options to extend its liquidity runway,” Thames said.
The company has been in a mounting financial crisis for two years as it struggles with a mountain of debt made more difficult to bear by higher interest rates. It also faces several investigations by Ofwat and environmental regulators over its performance on water leakage and sewage spill targets, and by Ofwat over recent dividend payments.
Its current owners, led by the Canadian pension fund Omers and the Universities Superannuation Scheme, which manages the retirement savings of UK university staff, had pledged to inject up to £3.5 billion of new equity to help the company take on more debt to pay for higher levels of investment. But in March the shareholders declared the company “uninvestable”, saying Ofwat was not prepared to approve the level of price increases the company needed over the next five years. The investors have since written down the value of their shareholding to zero, and said they will walk away.
Chris Weston, Thames Water’s chief executive, in the job since January, has insisted that the company plans to seek new equity and debt investors. Industry sources say one possible solution is a debt-for-equity swap, where lenders to the company cut the value of their loans in return for shares.
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Moody’s has cast doubt on Thames’s ability to attract new shareholders: “We see elevated risk that existing or future equity investors may view the proposed risk and return profile as not sufficiently attractive to provide the sizeable equity requirement of at least £2.5 billion under Thames Water’s current business plan and likely more in the context of the proposed [prices] determination.”