Thames Water’s parent company Kemble Water Finance Limited has had its debt rating reduced by Fitch to reflect pressure following Ofwat’s final determinations in December.
A lower cash flow at Thames because of the 2020-25 price review will intensify the pressure on Kemble, said ratings agency Fitch in a recent trading update.
The company’s senior secured debt rating was downgraded from BB- to B+, while its Issuer Default Rating (IDR) fell by the same level.
Fitch gave the company a “Negative Outlook” to reflect the low headroom at its new rating level and general uncertainty associated with the long-term impact of the coronavirus.
Following the final determinations in December, Fitch downgraded Anglian and Thames to Rating Watch Negative. S&P and Moody’s similarly lowered their ratings across the sector, a move dismissed by Ofwat chairman Jonson Cox as a tool to put pressure on the regulator.
Thames’ outlook could be revised to Stable, Fitch said, if it continues to significantly improve its operational performance and incur fewer ODI penalties.
In a rating note the agency observed the reliance of holding company Kemble upon Thames’ dividends to service its debt and the vulnerability of that revenue on the dividends that could be negatively affected by operational underperformance.
The significant drop in the weighted average cost of capital (WACC) will put pressure on cash flow and the capacity to distribute dividends, which when coupled with Ofwat’s stretching cost and performance targets exacerbate the company’s position.
Fitch estimated Kemble’s gearing at about 91 per cent in AMP7 – far higher than Ofwat’s notional level of acceptable gearing and leaving the company more exposed to complications.
Customer satisfaction and supply interruption targets were identified as likely stumbling blocks for Thames as well as leakage, which Fitch said could result in modest penalties. Thames was tasked with cutting supply interruptions by 53 per cent and reducing leakage by 20.4 per cent.
For the year to date as of February 2020 Thames achieved a 21 per cent leakage reduction.
The challenge of maintaining the level of leakage reduction in a densely populated city with aging infrastructure cannot be understated, Fitch admitted, saying it recognised the progress as “early signs of turning the business around” and it anticipates further improvements.
Thames was allowed conditional funding by Ofwat as part of the final determination to improve performance and reduce risks to resilience of the infrastructure – a total of £480 million will be permitted during AMP7, subject to Thames meeting certain requirements.
Uncertainty around coronavirus could alter revenues for Thames, Fitch predicted, which it said could ultimately lead to lower than allowed revenue in 2021. However, it estimated these could be recovered over the next two years.