Fitch Ratings has issued downgraded ratings for three UK water holding companies, raising concerns over business risk in the water industry.
Osprey Acquisitions (Anglian Water), Kelda Finance (Yorkshire Water) and Greensands UK (Southern Water) have been downgraded from stable to negative.
A sustained drop in dividend cover during AMP6 and AMP7 price controls could lead to further negative rating action for the companies.
Fitch said the rating action reflects its reassessment of the industry business risk ahead of the upcoming regulatory price control (PR19) in the sector and its revision of negative rating sensitivities for companies.
“We believe that the business risk in the UK water industry is increasing due to a tougher proposed regulatory package for the next price control, offering lower cash flow visibility as more revenue will be at risk with a higher proportion of the allowed return linked to performance,” the credit rating agency said in a statement.
“We also factor in a modest reduction in the long-term predictability of the regulatory framework, driven primarily by the industry regulator’s (Ofwat) recent decision on sharing with customers capital structure-related outperformance and introducing more scrutiny around dividend distributions.”
Osprey and Kelda’s long-term issuer default ratings have been listed as “BB”, while Greensands’ is “B+”.
A spokesperson for Yorkshire Water said: “This was a widely expected sector wide move by Fitch following the confirmation of Ofwat’s proposals to rebalance benefit sharing in water companies.”
Utility Week has contacted Anglian Water and Southern Water for comment.
No other issuer ratings in the UK water sector are immediately affected, although Fitch has decided to tighten ratio guidelines for all rated UK water holding and operating companies.
Fitch said it expects to review further individual ratings as it gains more clarity on water companies’ business plans from late 2018.