S&P Global Ratings has today lowered its issue ratings on the class A senior secured debt issues by Southern Water Services (Finance) Ltd. (SWSF) to 'BBB+' from 'A-' and the rating on the parent company Southern Water (Greensands) Financing PLC (SWG) to 'B', based on governance issues.

The ratings agency said the outlook on both is negative, reflecting issues including:

• the lack of track record on the mitigating measures put in place by the management
• the uncertainty around the ongoing investigation by the Environment Agency (EA)
• potential additional litigation as consumers still have the opportunity to voice their opinion on the Ofwat-imposed fine until July 19.

The rating action follows the £126 million fine that Ofwat issued to Southern Water, which is to be paid over five years, for significant breaches of its licensee conditions and its statutory duties.

S&P Global Ratings said it believes that Ofwat’s action indicates material deficiencies in SWSF's management and governance policies and general risk in the management framework, commenting:

“Although we understand that Southern Water has implemented a comprehensive action plan to resolve the shortcomings identified by Ofwat, these findings indicate a material weakness in management and governance, in our view.”

“We consider they have an adverse impact on the company's reputation, regulatory risk, its credit metrics, and its overall credit quality, particularly within a broader environment of higher political and regulatory risks.”

The water company has put a series of mitigating policies in place, including more stringent water controls, a new whistleblower policy, and the creation of a new Head of Risk and Compliance role. There have also been significant changes to the current Southern Water Board and senior management team in recent years, with the current CEO Ian McAulay joining in January 2017.