Moody's downgrades Thames Water to "junk" status

The US credit rating agency Moody's has drastically downgraded Thames Water's creditworthiness to "junk" status, further pressuring the troubled British utility company. The downgrade was due to "weaker liquidity" and the possibility of covenant breaches in the company’s debt. Thames Water, which provides water and wastewater services to around 16 million households, requires two investment-grade credit ratings to maintain its license. However, the water regulator Ofwat may exempt the company from this requirement. Earlier this month, the rating agency S&P also indicated it might downgrade the utility's safest bond class. The company informed Ofwat of potential further downgrades by April 2024 and is working intensively to secure long-term financial stability. The latest downgrade could further increase financing costs and potentially push the company into special administration, a form of temporary renationalization. Thames Water states that it has enough liquidity until May next year but needs an additional £750 million in equity by then and a further £2.5 billion by 2030. The shareholders, including Canadian pension funds Omers and the UK’s USS universities, declared the company "uninvestable" in April and withdrew their investment commitment of an additional £500 million. Attracting new investors is complicated by Ofwat's proposed limited increases in water bills. Moody's warned that without new equity, Thames Water could breach financial thresholds, necessitating bondholder consent for further borrowing. The financing structure used to service various debt levels results in Thames Water's highest-ranking bonds generally having higher investment-grade ratings than comparable corporate bonds. However, Moody's recent action means that the top-rated "Class A" bonds are now just below investment grade, while the lower-tier "Class B" bonds are sliding further into junk territory. Some top-rated Thames Water bonds are already trading below 70 pence per pound, indicating significant losses even for the highest-ranking bondholders, while "Class B" bonds are fetching only a quarter of their nominal value. In addition to the £16.5 billion debt of the regulated utility, the parent company Kemble Water owes additional amounts, raising the group's total debt to over £18 billion. Kemble Water’s bonds—named after a village near the source of the Thames—are already in default, with near-total losses for investors. In the UK House of Commons, Sir Keir Starmer stated that the government would hold the boards of failing water companies accountable. The Prime Minister emphasized that customers should not pay for the water companies' mismanagement and announced stricter measures against these firms.