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Thames Water’s credit rating has been slashed to the lowest reaches of junk, as the company races to refinance £530mn of debt in the next 11 days to avoid collapsing into government-backed administration.
Both S&P and Moody’s cut the rating on Thames Water’s £16bn of top-ranking debt by five notches to the equivalent of CCC+ on Tuesday evening, a level that is considered highly risky and prone to default.
Thames Water has to extend a £530mn credit facility from banks that falls due on October 7, if it is to stay within an updated forecast made last week of having enough cash to last into the new year.
If Thames Water is unable to roll over its credit lines it could be tipped into special administration — a de facto nationalisation — with the government having to fund its operations.
While taxpayer money put in during this process would rank ahead of Thames Water’s existing debt, it could put further strain on the government’s finances at a time when chancellor Rachel Reeves has already warned of a £22bn fiscal “black hole”.
Both rating agencies blamed the utility’s deteriorating cash position, with S&P citing “near-term liquidity stress” and Moody’s stating that the utility has a “significantly tighter liquidity position than previously expected”.
The Financial Times reported on Tuesday that Thames Water was burning cash at a faster rate than it earlier expected, piling pressure on the company.
Thames Water last week announced it would run out of cash shortly after Christmas if it was not able to get permission from banks to access liquidity reserves and roll certain credit facilities.
S&P said this announcement was “contrary” to previous expectations and that owing to “deficiencies in the liquidity risk management” it now assessed Thames Water’s “management and governance as negative”.
Commenting on the downgrades, Thames Water said: “We continue to operate to the undertakings agreed with our regulator in July 2024 following the reduction in our class A debt rating to subinvestment grade and we continue to engage with creditors to consider options for the extension of our liquidity runway.”
Thames Water, which supplies water and sewerage services to roughly a quarter of the population in England, is struggling under the weight of its nearly £19bn of debt, including borrowings at its parent company that fell into default in April.
Both rating agencies have kept Thames Water on a “negative” outlook, meaning it could be on course for further downgrades, with both Moody’s and S&P citing the growing expectation that the utility would renegotiate its debt to the detriment of its lenders.
“We see material risk of a debt restructuring, which we would consider akin to a default,” said S&P.
Thames had already breached legal licence conditions after earlier credit downgrades, putting it at risk of a fine equivalent to 10 per cent of revenue.
However, the company struck a deal with Ofwat whereby it avoided a potential fine in exchange for agreeing to tighter scrutiny from the regulator. That includes the appointment of an independent monitor, who will attend some board meetings and provide monthly reports to Ofwat. The appointment of the monitor, expected to be a consultancy, is anticipated within days.
Thames Water has appointed investment bank Rothschild & Co to raise billions of pounds of equity to stabilise the business and deliver infrastructure improvements in a process due to conclude this autumn.
However, investors’ willingness to contribute will be conditional on a generous settlement from Ofwat over bill increases for customers and a deal on fines, which could wipe out any equity. A final decision on that is not due until Christmas at the earliest.
Thames Water is also in negotiations with a group of 90 creditors holding £9bn of debt at the utility’s operating company to provide a new loan that could be in the region of £1bn to further ease pressure on its finances before year end, according to people familiar with the negotiations.
Sarah Olney, the Liberal Democrat MP for Richmond Park, said Thames Water was a “broken firm”, adding: “The new government must now act before it’s too late, take Thames Water into special administration and get customers the fair deal they deserve.”
The Department for Environment, Food and Rural Affairs said the company remained “stable” but added: “The government is closely monitoring Thames Water’s situation.”
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