Moody's Ratings has downgraded Thames Water again - the rating action follows Thames Water's announcement on 20 September 2024, that most of its liquidity would expire by December 2024, and accessing remaining liquidity will require creditor consent.

Moody's Ratings has downgraded to Caa1 from Ba2 the corporate family rating (CFR) as well as to Caa2-PD from Ba3-PD the probability of default rating of Thames Water Utilities Ltd. 

Concurrently, the ratings agency 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 Caa1 from Ba1 and its backed subordinated debt (referred to as Class B under its finance documents) ratings to C from B3.

Moody's says the outlook on Thames Water and TWUF remains negative.

On 20 September, Thames announced that, as at 31 August 2024, it had £1.57 billion of liquidity consisting of £1.15 billion of cash and cash equivalents (including dedicated reserves of £0.38 billion) and £0.42 billion of Class A and Class B undrawn committed facilities.

The company's announcement indicates that the company will run out of cash by December 2024 unless it utilises its reserves with creditor consent, rather than the company's previously stated liquidity runway to May 2025.

Moody’s said the downgrade reflects a significantly tighter liquidity position than previously expected and its view that this will likely lead in the near term to a distressed exchange, where creditors agree to some form of amendment or extension of credit terms that results in a loss, or a loss is otherwise imposed on them, relative to the original promise to pay.

A distressed exchange of this type constitutes a default by Moody's definition. In the medium term, inability to attract new equity funding may ultimately lead to a 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.

Thames Water stated in its announcement that it remains in discussion with creditors to release these cash reserves, likely requiring a waiver of the event of default that would otherwise result.

Moody’s Ratings believe that new equity funding is unlikely to be provided before Ofwat’s final determination is published in December 2024 or January 2025.

The ratings agency commented:

“Given the worsening liquidity situation and a potentially lengthy process to attract new equity funding, we believe that a distressed exchange over the coming months is now a highly likely scenario. This could initially take the form of amending and extending existing terms of outstanding debt.

“In addition, a final determination that does not move materially from a tough draft regulatory determination may not provide an attractive risk-return balance for existing or new investors. Inability to attract new equity funding may ultimately lead to a 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.”

Overall, Moody’s view is that Thames Water's business risk remains supported by the company's position as a monopoly provider of essential water and sewerage services.

However, the Caa1 CFR is constrained by Moody’s view of the high likelihood of a distressed exchange.

Thames Water's rating outlook remains negative, reflecting the risk that any potential creditor loss following a default may be higher than embedded in current ratings.