Fitch Ratings is warning that some UK water companies will “find it challenging” to maintain their existing credit ratings for AMP8 - and those who fall to do so will be subject to a regulatory cash-lock up.
The Fitch Ratings team have been taking an in-depth look at its portfolio of UK Water companies Fitch rates all the UK water companies, apart from Thames Water where it rates the holding company Kemble.
In a newly-published special report on the sector, Fitch says the Draft Determinations recently announced by UK water regulator Ofwat for the AMP8 April 2025 to March 2030 investment period, introduces several significant changes compared to the current AMP7 April 2020 to March 2025 period.
The new report identifies companies that Fitch views as ‘below average’ from an operational standpoint and those with low headroom compared to the current rating sensitivities.
According to the ratings agency, despite higher allowances than in AMP7, the overall outcome of the for the AMP Draft Determinations remains challenging. The Determinations approve lower totex allowances than those requested in the AMP8 business plans submitted by the water companies in autumn 2023. The report says that this, coupled with other adjustments, presents significant challenges for many companies.
The analysis of the business plans and Ofwat’s Draft Determinations highlighted challenges related to key building blocks factors, such as the pay-as-you-go (PAYG), post-financeablilty adjustments and run-off rates, ultimately affecting financial ratios.
Ofwat has increased the average PAYG rates (representing totex recovered in the same financial year it is incurred) on average for water network plus and wastewater network plus, with no change for water resources and lower for bio-resources. However, the DD PAYG rates represent a significant average reduction in EBITDA when compared to business plans, which is also attributed to the prominence of totex related to enhancement allowances.
Water and wastewater companies with two or more ‘low’ headroom assessments for the three key credit ratios – net debt/regulatory capital value (RCV), cash post maintenance coverage ratio (PMICR), and nominal PMICR – will find it challenging to maintain their existing ratings for AMP8.
In some cases, companies within this category may struggle to sustain a rating at least one notch above Ofwat’s new licence condition, Fitch says, which requires a minimum credit rating above 'BBB'/Negative.
The ratings agency is warning that companies who fail to maintain this rating who fall to this level or below will will be subject to a regulatory cash-lock up.
Click here for details of how to access the report.
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