24 July 2024 , 18:42
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Move by ratings company Moody’s puts Thames in breach its operating licence but Ofwat likely to hold off on large fine
Thames Water has breached its licence to supply water to nearly 16 million people after some of its debt was downgraded to junk status.
The regulator Ofwat could now fine Thames, the country’s largest water monopoly, up to 10% of its annual turnover, equating to hundreds of millions of pounds. However, since the company is already teetering close to temporary renationalisation, Ofwat is likely to hold off on any immediate large fines.
Urgent talks are being held between Thames and Ofwat to try to find a way to turn the company’s management and finances around, with expectations that these must conclude, for better or worse, next month, the Guardian understands.
Thames is labouring under a £15.2bn debt mountain and has been brought to its knees after billions of pounds in dividends were extracted by its former owners, including the Australian bank Macquarie.
If the talks fail, it is unlikely Thames will be able to escape being pulled on to the UK government’s balance sheet via a special administration regime, although Thames said it was still seeking fresh investment.
The company, which serves 16 million customers in the London and Thames valley regions, has said it has enough money to continue its operations until May next year. It said in response to the downgrade that it “continues to work with Ofwat” on its “financial resilience”. For its customers and workers it was “business as usual”, it said.
The downgrade came from Moody’s, one of three big credit ratings companies that categorise debt according to the perceived risk of it not being repaid. A separate downgrade is expected from another ratings company, S&P, in the coming weeks.
Thames had signalled earlier in the year that a downgrade might be imminent and would put it in breach of its licence obligations.
A key bond at Thames Water Utilities Finance plc – within the ringfenced part of Thames’s complex corporate structure that is overseen by Ofwat – was cut to a ranking of Ba1. This is one notch into Moody’s definition of junk territory, also termed non-investment grade.
Water suppliers’ operating licences were changed in 2020 to require them to keep their debt rated as so-called investment grade. The move was meant to ensure they remained attractive to long-term, patient investors such as pension funds, which are often restricted from investing in riskier debt with lower ratings, known as junk.
Thames will need an additional £2.5bn from investors to fulfil its business plan. Ofwat said in a draft decision in July that Thames could increase bills by £99 to £535 a year over the next five years, £92 less than the rise it sought.
Moody’s cited Thames’ “weakening liquidity position” in its explanation for the downgrade and said “existing or future equity investors may view the proposed risk and return profile as not sufficiently attractive” for such a large injection of new cash.
An Ofwat spokesperson said: “This downgrade reinforces our position that a comprehensive financial and operational turnaround in Thames’ operations is essential.”
Water companies in England and Wales operate under a 25-year rolling licence. These can only be revoked under certain conditions, including entering the special administration regime.