Moody’s ratings agency is warning in a report published today that pressure from Ofwat, including possible licence changes, could force highly leveraged companies to seek fresh equity ahead of what the ratings agency expects to be a tough price review in 2019.

Image:Ofwat

Jonson Cox, chairman of Ofwat, the economic regulator for the water and sewerage companies in England and Wales, has challenged companies to improve their financial resilience and adjust dividend policies in the face of continuing questions around the sector’s legitimacy.

The rating agency said that while such balance sheet strengthening would be credit positive, the imposition of explicit restrictions on companies’ capital structures would represent “a divergence from past regulatory practice.”

In a speech at the Water UK City Conference last week the Ofwat Chairman noted recent criticism and “high profile challenges to the legitimacy of the sector”. He particularly focused on “aggressive financial structures” and questioned the financial resilience of highly leveraged companies with gearing in excess of 70%.

The report says that prices at which stakes in the private equity-owned highly leveraged water companies have recently changed hands suggests that they continue to be seen as attractive investments. However, Moody’s is warning that shareholders may be reluctant to inject additional cash.

The water companies are due to submit their business plans to Ofwat for the Price Review in 2019.

According to Moody’s, this leaves little time for companies to plan and potentially implement significant changes to their capital structures - and raises questions about the ability and willingness of equity investors to provide additional funding.