Its Baa1 outlook was downgraded from stable after the company announced it would seek technical amendments on the financing of the tunnel.
Moody’s said the company might not be able to absorb the financial risk posed by its involvement in the project. If senior creditors approve Thames’ amendments, the company would be exposed to “reputational and financial challenges that other companies in the sector do not face”.
The ratings agency is also concerned that regulator Ofwat’s price review is likely to result in significantly lower returns for Thames Water, putting further strain on its ability to raise funding for the tunnel.
Ofwat announced in January that its target weighted average cost of capital (Wacc) is 3.85 per cent for 2015-2020, down from 5.1 per cent in the current cycle.
Moody’s said that highly leveraged companies including Thames, Yorkshire and Anglian were most at risk from a lower rate of return.