Ratings agency Moody’s Ratings has downgraded Thames Water’s debt further this week, and increased its view of the probability of default, changing its outlook on Thames Water from stable to negative.
Thames Water is currently attempting to secure billions in emergency funding, but this week rumours emerged that the government has approached potential administrators.
Moody’s Ratings, which ranks the creditworthiness of borrowers, has downgraded to Caa3 from Caa1 the corporate family rating (CFR) as well as to Ca-PD from Caa2-PD the probability of default rating of Thames Water Utilities Ltd. Moddy’s has also downgraded the backed senior secured debt (referred to as Class A under its finance documents) ratings of Thames Water’s guaranteed finance subsidiary Thames Water Utilities Finance Plc (TWUF) to Caa3 from Caa1 and affirmed its subordinated debt (referred to as Class B under its finance documents) ratings at C. The outlook on Thames Water and TWUF was changed to stable from negative.
Moody’s said the downgrades followed on from the publication of Ofwat’s final determination for the regulatory period running from 1 April 2025 to 31 March 2030 (known as AMP8), published on 19 December 2024.
Moody’s view is that the final determination does not provide an attractive risk-return balance for existing or new investors, and believes this may deter new equity funding and increases the likelihood of a more severe haircut to senior debt than embedded in the previous ratings, either through a potential future creditor-led debt restructuring or one that is imposed as part of a special administration process, should the company meet the criteria for special administration to be called.
Moody’s also stated that it believes that Thames Water’s liquidity is inadequate. In a statement, the ratings agency said:
“As at 30 September 2024, the company had committed liquidity of £1.5 billion (£1.1 billion cash and £0.4 billion undrawn under revolving credit facilities). The undrawn revolving credit facilities would be cancelled if the current debt restructuring process is successful and Thames Water has agreed not to draw these without the consent of the relevant lenders ahead of its implementation. This liquidity is only sufficient to allow meeting all liquidity needs into March 2025. An initial debt restructuring, expected to conclude in February 2025, would, if approved, (1) provide up to £3.0 billion super-senior liquidity, with the first £1.5 billion backstopped by creditors; and (2) extend all debt maturities by two years, deferring £3.2 billion of maturities currently due by February 2027. However, the company will only establish a more sustainable capital structure and funding position after a second debt restructuring, expected to take place later this year and involving the raise of new equity.
“The current restructuring plan is contested in court by the company’s Class B creditors, which are offering an alternative liquidity proposal. Should the initial proposal fail and no alternative agreement be reached before the end of March 2025, we expect the company would enter into a standstill under its finance documentation. A standstill would lead to significant restrictions in capital spending and we believe would increase the likelihood of Thames Water having to enter into special administration.”
Moody’s said an upgrade of the ratings is unlikely in the near term.
