Moody’s ratings agency is warning that the water sector regulator’s proposals are threatening to undermine the stability and predictability of the regime.
In a research analysis report published today, Moody’s say that Ofwat plans to claw back ‘high-gearing outperformance’ set out in its consultation paper published in April 2018 would hurt companies with debt much in excess of 60% of their regulatory capital value (RCV) and reduce already lower allowed returns further.
According to the ratings agency, the proposals are a response to public and political pressure, but undermine the track record of stable and predictable regulation. The upcoming Price Review in 2019 is likely to be “credit negative for most companies” - Moody’s now hold negative outlooks on 60% of the rated water companies and the sector as a whole.
It also sees Ofwat’s moves to exert greater influence over companies’ capital structure and dividends and to claw back the benefit of higher gearing as representing "significant departures" from past regulatory practice.
Moody’s said the proposals follow a series of exchanges between the UK government and the regulator which were motivated by a “perceived lack of public trust” in the sector’s corporate governance and financing arrangements.
The ratings agency is warning of “increasing risk of future political interference” in the design of the regulatory framework. It also points out that the route of financial outperformance is no longer open to companies at PR19 and “operational outperformance may become more challenging. “
The ratings agency concludes:
“Management will need to refocus attention on the water and sewerage business itself to generate solid returns, and not all may rise to the new challenge. The sector could face a painful transition to a more resilient credit profile.”
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