Thames Water owner Kemble has suffered a downgrade in the credit rating of its debts from influential agency Moody’s.
The credit ratings agency has lowered its position on a £400m segment of Kemble’s debts – due 2026 – from B1 to B2, meaning it considers the sums to be highly speculative and a credit risk.
It has also maintained a negative investment outlook, warning Thames Water’s gearing remains high at nearly 80 per cent, raising questions over how it will fund its turnaround plans.
This follows Ofwat’s decision in March to strengthen ring-fencing conditions, protecting funds from commercial operations and dividends, in the licences of water companies in England and Wales, alongside increased scrutiny on the financial resilience of Thames Water, which is Kemble’s core operating subsidiary.
Under current licence conditions, regulated water and wastewater companies are not allowed to pay dividends while their credit rating is B3 or lower by any one agency, with Ofwat planning to raise the threshold to B2 by April 2025 – which puts Thames Water under threat.
Moody’s now forecasts the risk of a dividend block at Thames Water – due to its poor operational performance – alongside heightened scrutiny in the firm’s financial resilience, will weigh on lender appetite, as Kemble chases stakeholders for more funds to power business’ turnaround plans.
While investors have reiterated their support for Thames Water, the latest £750m equity injection comes with strings attached, including higher water bills for customers from 2025 as part of Ofwat’s next pricing review, which may not be achieved.
The credit rating agency argues this undermines the credit quality of the company as it aims to fund a turnaround strategy to fix leaking pipes and sewage overflows.
Thames Water is currently supported by a liquidity position of £4.4bn, but has also confirmed it needs £2.5bn over the next regulatory period to maintain operations over 2025-2029.
City A.M. has approached Thames Water for comment.