Ratings agency Moody's has published two new reports discussing how covenanted financing structures are helping to mitigate growing business and financial risks for UK regulated utilities.
The UK regulated water and energy networks have historically utilised different funding
models, but group structures continue to evolve and complexity is increasing. In the midst of rising political and regulatory pressures on the sector, companies are facing pressure to deleverage to protect credit quality.
In the reports Moody's discusses credit risk considerations of different capital structures as
well as the protection that regulatory or contractual ring-fencing can provide to operating company creditors.
In "Regulated water utilities and energy networks -- UK: Increasingly complex group structures create diverging opco and holdco credit risk", the rating agency is highlighting that operating company gearing for UK water companies can be as high as 85%, whereas UK energy networks' tend to exhibit lower gearing levels.
However, the credit quality of the operating energy network companies will also be exposed to additional, and in some cases significant, debt at holding company level, unless regulatory or contractual protections allows at least partial insulation from the wider group.
In this context, Moody's also debates the continuing credit benefit of highly covenanted financing structures, even as companies are forced to deleverage, in a second report "Regulated water utilities -- UK: Covenanted financing structures help mitigate growing risks".
Stefanie Voelz, senior credit officer at Moody's and author of the reports commented:
"Covenanted financing structures mitigate a range of business and financial risks, and regulators are increasingly looking to replicate common restrictions in companies' licences, in order to bolster the regulatory ring-fence."
"However, any improvement in regulatory ring-fencing will, in the same way as contractual ring-fencing does, benefit primarily operating company creditors. Thus, holding company creditors' credit risk will likely increase, if regulators follow through with their proposals."
on www.moodys.com.
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