Moody’s has announced a number of negative rating actions for a clutch of UK water companies, reflecting what the ratings agency describes as rising UK water sector risk and a deterioration in the sector's business risk profile.
Southern Water’s debt downgrade from the last of its investment-grade ratings Baa3 to Ba1 puts it on junk status. Moody’s says this also reflects a history of material operational and financial underperformance by Southern Water and the risk that this will “extend well into the next regulatory period.”
According to the ratings agency, this may act as a deterrent to raise the required £4 billion new debt and at least £650 million new equity capital as per the company's representation to Ofwat's draft determination.
Moody’s has issued individual ratings actions for the following water companies:
- Southern Water downgraded to Ba1, on review for further downgrade
- South East Water downgraded to Baa3, on review for further downgrade
- Affinity Water's ratings placed on review for downgrade
- Northumbrian Water outlook changed to negative
- Anglian Water's A3 ratings placed on review for downgrade
- Southern Water downgraded to Ba1, on review for further downgrade
- South East Water downgraded to Baa3, on review for further downgrade
- Affinity Water's ratings placed on review for downgrade
- Northumbrian Water outlook changed to negative
- Anglian Water's A3 ratings placed on review for downgrade
- United Utilities outlook changed to negative
- Wessex Water outlook changed to negative
- Welsh Water ratings placed on review for downgrade
The individual company ratings actions are all prefaced with the same rating rationale which states:
“In the face of continuing public scrutiny and heightened political and regulatory focus, there has been a material and sustained weakening of credit quality for nearly all companies. Past decisions, across the sector, including to prioritise affordability and shareholder distributions, have contributed to underinvestment and exacerbated the sector's exposure to changing weather patterns, population growth and shifting expectations. Regulatory targets have become more demanding and penalties for those that fall short have continued to grow. With widespread investigations, fines for UK water companies breaching environmental legislation are likely to increase further.
“In addition, a perception that the water sector is "broken" has prompted a government-initiated strategic review that aims to improve the regulatory environment and create a stable backdrop to attract investment. However, until completed and any potentially credit positive recommendations are successfully implemented, this review also brings increased near-term uncertainty.
“Taking account of the above, we have changed our assessment of stability and predictability of the regulatory environment for the UK water sector under our rating methodology to A from Aa.”