Thames Water’s parent company has been hit by a second downgrade to its credit rating in six months, with Moody’s warning of “materially” increased risks that regulators will block the flow of dividends.
The watchdog Ofwat is considering whether to investigate Thames for a potential breach of its licence when it paid a £37.5m dividend in October, as revealed by the Guardian last week. The cash was paid from the core operating company that serves 16 million customers across London and the Thames Valley to a holding company.
The market price of a £400m bond issued by Thames Water (Kemble) Finance, one of the key financing entities that sits above the regulated water company, hit an all-time low of less than 50p in the pound after Moody’s unpublicised downgrade on Wednesday. The dividend was part-used to service its debt obligations.
The move comes in a week in which Thames appointed a new chief executive but its chair revealed he was speaking “two or three times a week” to shareholders to “jolly them along” before their crunch decision next year on whether to inject more equity to prop up a group with overall debts of £16bn.
The regulator introduced a new licence condition in May that places stricter restrictions on dividend payments if a company is failing customers or the environment, or if its financial resilience could be harmed. Thames is among the worst-performing major water companies and also one of the most indebted, with borrowings of almost 80% of the value of its assets versus a regulatory norm of 60%.
Ofwat’s demand for information from Thames on the dividend prompted the Moody’s review, even though the Kemble company’s rating was cut from B1 to B2 as recently as July. The new rating is B3, a lower level of junk.
The agency wrote: “Because of the further tightened regulatory scrutiny of Thames Water’s distributions, Moody’s believes that the uncertainty around the operating company’s ability to make necessary distributions has increased materially.”
Sir Adrian Montague, the chair of Thames and the ultimate parent company, Kemble Water Holdings, conceded that the dividend was “discretionary” in testimony to MPs on the environment select committee this week. However, he argued that the payment was needed to try to keep wavering shareholders loyal.
He said: “Long story short, we paid that £37m to keep Kemble secure. We need to keep Kemble secure because a failure to do so will prejudice our new equity. And the new equity is needed to sustain the provision of services to our customers in the long term.”
Thames’s largest investor, with a 32% stake, is Omers, a Canadian pension scheme. Others include the Universities Superannuation Scheme, the pension fund for UK university academics, plus sovereign wealth funds from China and Abu Dhabi.
A £750m equity injection by the owners is earmarked to happen before March 2025, to be followed by £2.5bn from 2025-30, but both are conditional on what Thames has called an “appropriate” regulatory settlement in the next price control period. Thames is seeking to increase bills from £436 to £611 a year in the five years from 2025 to help pay for £18.7bn worth of investment and, controversially, wants a cap on potential financial penalties.
Montague told MPs the shareholders “need to understand whether sufficient cash is going to come into the company to support further investment”. He added: “I speak to them two to three times a week because I think it’s important that we help them along, jolly them along, until we get to a point of decision. We are not yet at a point of decision. We will be when white smoke emerges from Ofwat.”
Kemble faces the repayment of a £190m bank loan in March 2024, for which it will try to extend the deadline. However, Moody’s said it also faces “further sizeable maturities”, including £510m between July and December 2025, £150m in April 2026 and then the £400m secured bond in May 2026.
Its downgrade note said: “While shareholders have reiterated their support for Thames Water, further equity injections remain subject to conditions and may fall short of what is needed to underpin the credit quality of the holding company in the context of a challenging turnaround and heightened political and regulatory scrutiny.” It said the formal rating outlook for Thames Water (Kemble) Finance remained negative.
The £400m bond fell to 56p in June after the resignation of the former chief executive Sarah Bentley, when fears mounted that the government was preparing contingency plans to nationalise Thames. These short-term fears abated after a £500m injection of capital and the conditional pledges of more to follow. However, the price of the bond fell to 48.5p this week.
Thames Water Utilities, the full name of the regulated operating company, said in its half-year results earlier this month that it had £3.5bn of financial liquidity to underpin its investment programme during the current regulatory period that ends in March 2025. It maintains an investment grade rating. Its new chief executive, Chris Weston, is the former head of the power supplier Aggreko.