Moodys Investors Service is warning it “cannot fully exclude some contagion risk” resulting from the formal notices of default sent by Thames Water's holding company Kemble Water Finance Limited and its financing subsidiary Thames Water (Kemble) Finance PLC to the holders of their debt instruments, including the £400 million 4.625% senior secured notes due in May 2026.
This followed a missed interest payment on certain debt instruments of Kemble Water Finance Limited, which was due on 2 April 2024.
The warning comes in a Credit Opinion Update published by Moodys on Thursday last week following its earlier downgrade on 3 April 2024 of operating company Thames Water Utilities Ltd.to Baa3 negative.
According to Moodys, the contagion risk results from a default by the holding company Kemble which would allow Kemble lenders to enforce their share security and take ownership of the wider Thames Water group.
The Update states:
“This would increase uncertainty around the amount and timing of future equity injections into Thames Water, reducing the company’s ability to continue its growing investment programme.
“The uncertainty created on potential future ownership changes should holding company lenders enforce their share security as well as the general reluctance of existing shareholders to commit to further equity injections at this point in time also continues to adversely affect Thames Water's ability to raise funding at competitive terms.
“While the company received £500 million of equity in March 2023, further proposed contributions of up to £750 million over the remainder of the current regulatory period have been delayed. This delay increases uncertainty over future equity injections for the material medium- to long-term investment needs.
“The delay may also weaken the company's ability to access future capital on competitive terms, with the cost of its debt financing rising since the sudden resignation of its previous CEO in June 2023 and subsequently increasing regulatory, political and public scrutiny regarding its operational performance and financing structure.”
A track record of weak operating performance by Thames Water, coupled with more demanding targets has led to increasing penalties is among a number of credit challenges flagged up in the Update.
Click here for more information about the Update
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