A total of six water groups in the UK have been assigned or maintained negative outlooks by Moody’s Investors Service (Moody’s) this week.

The credit rating provider has named five regulated water companies and one “high-yield” holding company, which it considers “most exposed” to the likely cut in allowed returns from 2020.

Following Ofwat’s publication of its PR19 methodology, which included an initial view of the cost of capital of 2.4 per cent in RPI terms – a record low for a regulated utility – Moody’s has changed the outlook to negative for Anglian Water (Osprey) Financing; Portsmouth Water; Severn Trent and Yorkshire Water.

Meanwhile negative outlooks have been maintained for Northumbrian Water and Southern Water.

A spokesperson for Severn Trent, said: “We believe Moody’s has taken an overly prudent view and doesn’t assume any AMP7 outperformance, and that our AMP6 performance is no guarantee of success in AMP7.

“We believe we have two years to get ready and our AMP6 track record and culture should give investors confidence in our ability to generate strong cashflows.”

Liz Barber, Yorkshire Water’s director of finance, regulation and markets, said the company has taken steps to improve its financial resilience, which have been welcomed by both Moody’s and Ofwat.

She said: “As a result of these, our interest costs have fallen, our balance sheet has been restructured and our gearing is set to fall over time. These measures, which have been successfully executed over the last 12 months, were part of prudent planning enabling us to manage the likely reduction in Wacc [weighted average cost of capital] over the next investment period. They’ve also enabled us to re-invest in service improvements ahead of any outcome in the periodic review.”

Barber said Yorkshire Water has “completed a further transaction” this week, after Moody’s announcement, which has resulted in a reduction in the company’s interest costs.

“This transaction forms part of Yorkshire Water’s focus on reducing interest expense and building financial resilience ahead of AMP7 and AMP8. Further announcements of reductions in interest costs are expected over the coming months,” she said.

She added: “In addition, our process of disposing of non-core Kelda Water Services businesses is well underway, with one sale complete and a further sale expected shortly. The proceeds will be available to further reduce our gearing.”

Moody’s said its actions relate to the companies it considers most exposed to the likely cut in allowed returns from 2020, as guided by the regulator in its final PR19 methodology.

A statement from the firm, said: “Specifically, it reflects the risk that companies may not maintain a financial profile in line with Moody’s guidance for its current rating levels, taking into account their financial leverage and capital structure; and the cost and maturity profile of their debt in the context of likely financing and refinancing requirements over the 2020-25 period.”

It continued: “Compared with the July draft consultation, the final methodology includes small changes to the total expenditure incentive regime as well as outcome delivery targets, but overall efficiency requirements will likely remain challenging. The regulator is proposing to reward companies whose business plans it assesses as exceptional or enhanced, but the monetary adjustment will provide limited relief against the low headline return.”

Moody’s suggested companies with the highest leverage and/or expensive and long-dated debt are particularly exposed to the cut in returns.

“The smaller water-only companies also report higher debt cost linked to their relatively infrequent funding,” it said.

But Moody’s noted the PR19 process is in the early stages and the reduction “may be less than currently proposed or mitigated” by other aspects of Ofwat’s final determination.

It highlighted companies have “time to adapt financial policies and bolster financial flexibility ahead of AMP7”.