Credit ratings agency Moody’s has placed the water company’s rating under review for a possible downgrade due to the impact of low interest rates and concerns over its debt hedging strategy.
The review comes despite Ofwat’s final determination that was broadly in line with its submitted business plan.
Moody’s says that this, coupled with a solid operational performance track record, and the management’s “prudent approach” of reducing gearing to 80 per cent of net debt to regulatory capital value, does not offset the embedded financial risk faced by the company.
Moody’s vice president and lead analyst for Yorkshire Water Stefanie Voelz said the rating review “reflects the fact that a continuing low interest rate environment creates significant mark-to-market losses on the company’s sizeable derivatives portfolio.
“This increases the negative pressure on Yorkshire Water’s credit quality.”
Responding to the announcement from Moody’s, Yorkshire Water said it is “currently reporting best ever levels of performance and has robust investment plans in place to deliver further service and environmental improvements over the period 2015 to 2020.
“Following a lengthy, in-depth and challenging price review process, our economic regulator Ofwat has just given us the green light to invest an additional £3.8 billion in the Yorkshire region over the next five years.
“This will deliver better quality drinking water, cleaner rivers and higher standards of customer service, ensuring we take a significant step forward towards achieving our existing 25-year business objectives.”
Yorkshire Water could maintain its current credit rating if Moody’s concludes that the risk of the derivatives portfolio remains manageable and does not adversely affect the company’s financial flexibility in comparison with its highly-leveraged peers.
The rating review is expected to be completed within the next three months.