S&P Global Ratings has today yet again downgraded Thames Water credit ratings, saying: “In our view, Thames Water's liquidity has deteriorated to a less-than-adequate position as we forecast that the company will not be able to cover its financial needs by 1.1x over the 12 months from the end of June 2024.”

S & P has already downgraded Thames Water earlier this month. On 9^th July Thames Water Utilities Finance PLC (Thames Water) announced that it could cover its liquidity needs until May 2025. The following day, the ratings agency placed its issue ratings on Thames Water's debt on CreditWatch with negative implications.

S & P Global Ratings’ latest announcement issued in the last hour says:

“We do not believe that Thames Water will have a remedy plan to cover its liquidity needs by 1.1x for the next 12 months before the autumn of 2024.

“We have revised our assessment of Thames Water's business risk downward to strong from excellent. This reflects the difficulties the company is facing in financing its large and inflexible capital expenditure (capex), which is driven by regulatory requirements.

“In addition, the company is in breach of its current license conditions. As part of Ofwat's requirements, Thames Water needs to maintain two investment-grade ratings. We understand that Thames Water is in ongoing discussions with Ofwat about this.”

Ofwat has publicly stated that this would not lead to a revocation of Thames Water's license.

S & P have lowered their issue ratings on the class A and class B debt to 'BB' and 'B', respectively, from 'BBB-' and 'BB' previously. They have also assigned a recovery rating of '2' to the class A debt, reflecting the expectation of 70% recovery, and a recovery rating of '6' to the class B debt, reflecting the expectation of no recovery in a hypothetical default scenario as part of S & P’s recovery methodology.

At the same time, the ratings agency have assigned a negative outlook to both ratings. The negative outlook on the class A and B debt ratings reflects the view of the risks stemming from:

• a continued deterioration in Thames Water's liquidity position;
• a delay in equity contributions due to the uncertainty around the company's operating conditions for the upcoming regulatory period;
• and potential intervention by the regulator.

Thames Water has stated that it is committed to increasing its common equity from either new or existing shareholders - something S & P views as essential for Thames Water to improve its operating performance and reduce its leverage in the next regulatory period.

However, S & P is not expecting that this will improve Thames Water's liquidity position in the near term on the assumption that this process is unlikely to be completed before Ofwat’s final determination on the company’s AMP8 Business Plan which is due at the end of December.

"Shareholders' current view of Thames Water's business plan as "uninvestable" questions availability of equity support and creates uncertainty around operational performance"

S & P also say that shareholders' current view of Thames Water's business plan as "uninvestable" questions the availability of equity support and creates uncertainty around the company's operational performance in the next regulatory period.

The ratings Agency say that Thames’ management had previously assumed £750 million in new equity, £500 million of which was due to be injected by end-March 2024. In April 2024, Thames Water estimated its equity needs at a total of £3.25 billion (£750 million in the current regulatory period and £2.5 billion in the next).

However, S & P is warning that such injections depend on

• a favourable outcome from the current regulatory process
• or a favourable outcome should the company request to refer its final determination to the Competition and Markets Authority,

The ratings agency says it assumes both options “will involve complex discussions.

In the absence of sufficient and timely equity support for its turnaround and business plans, S & P says:

“We believe that Thames Water's operational performance, which is already constrained and has consistently attracted regulatory penalties over the years, may weaken further.

“We view Ofwat's draft determination as relatively negative for Thames Water.

“We acknowledge that it is still early days and that the regulatory process is ongoing. However, Ofwat's assessment of Thames Water's business plan as "inadequate" puts the company at risk of regulatory capital value deductions at the start of the next regulatory period starting in April 2025. The company could also bear a higher portion of its overspending. However, unlike in previous regulatory periods, Thames Water's resubmission of its business plan may lead it to exit the inadequate assessment as part of the final determination.”

S & P’s negative outlook reflects continued deterioration in Thames Water's liquidity position and persistent uncertainties on support from existing or new shareholders for Thames Water's business plan.

A rating upside is contingent on the water company's ability to secure sufficiently favourable operating conditions for the AMP8 2025-30 investment period In S & P’s view, Thames Water would need to combine this with:

• significant deleveraging as a result of raising new equity
• a sustained improvement in operational performance
• an outcome from the Environmental Agency's current investigation that does not have a significant financial or reputational effect on the company.

Thames Water - “Increasing our financial resilience and securing an investible PR24 determination is a critical priority for the business" 

Commenting on S&P Ratings Action, Thames Water Utilities Finance plc said it notes the rating downgrades published today by Standard & Poor's, adding:

“Thames Water Utilities Ltd (TWUL) alerted Ofwat to the possibility of potential credit rating downgrades in April 2024 and continues to work with Ofwat to maintain the ongoing financial resilience of the business. Management is engaging with investors and its creditors and remains committed to seeking new equity funding and exploring all options to extend its liquidity runway.

“Increasing our financial resilience and securing an investible PR24 determination is a critical priority for the business. In the meantime, it's business as usual for our customers and our teams on the ground who will continue to supply our services and remain focused on the delivery of our turnaround plan.”