Following the announcement by Thames Water of a proposed liquidity extension transaction, S&P Global Ratings has further reduced Thames Water Utilities Finance PLC’s debt rating this week, lowering their issue-level ratings on the class A debt to ‘CC’ from ‘CCC+’ and class B debt to ‘C’ from ‘CCC-‘.
The ratings agency also lowered its recovery expectation on the class A debt, reflecting the potential introduction of additional super senior debt, and said that if the proposed transaction that it characterises as distressed debt restructuring were to occur, it would further lower the ratings to ‘D’.
S&P considers the proposed liquidity extension transaction a distressed debt restructuring for Thames Water’s class A and class B debt. On October 25, 2024, Thames Water announced a proposed liquidity extension transaction with related Security Trust and Intercreditor Deed (STID) proposals. S&P believes the proposed transaction includes changes that would mean investors receive less value than promised in the original class A and class B notes without adequate offsetting compensation.
Changes include:
- New funding of up to £3 billion that would rank super senior to existing debt, and hence reduce the payment priority of the existing class A and class B debt; and
- Extending the maturity for all class A and class B debt, including amortizing payments, by two years.
S&P does not consider the non-cash consent fee–neither the 0.75% early bird rate, nor the 0.5% rate–adequate compensation to the loss of value for investors compared to what was promised in the original bond.
In its view, the company’s financing structure no longer provides additional protections to its class A creditors during the Standstill Period. The STID proposal includes the release of cash from the reserve accounts, which was reserved to cover at least 12 months of interest and operating cash flow needs during the Standstill Period–a key feature of structural enhancement for the class A debt. S&P believes the proposed maturity extension for both classes of debt means any structural enhancement no longer reduces the risk of default for class A debt during the Standstill Period. It has therefore removed one notch of uplift from the stand-alone credit profile (SACP) on the class A debt.
The negative outlooks on both classes of Thames’ debt reflect that, if the proposed transaction that S&P characterises as distressed debt restructuring were to occur, the agency would lower the issue-level ratings to ‘D’.
S&P could downgrade the debt if Thames Water:
- Misses any principal or interest payments; or
- Implements the proposed distressed debt restructuring.
S&P said the agency could revise the outlook to stable or raise the ratings if Thames Water meaningfully improves its liquidity position without weakening terms for current lenders.
Currently, the credit ratings agency assesses Thames Water’s liquidity as weak.
