The Financial Times is reporting this morning that S&P has downgraded Thames Water credit rating – tipping the UK’s largest water and sewerage company debt further into “junk“ status.
According to the FT, on Monday the ratings agency cut the rating on the utility’s £16 billion top-rated debt from CCC+ to CC, and downgraded the rating on riskier class B debt from CCC- to C.
The FT quoted S&P as saying that as a result of the proposal last week that the largest holders of some of Thames Water’s class A debt would provide the emergency financing. other creditors would “receive less value than promised in the original class A and class B”
The FT article says:
“Thames Water said: “This downgrade does not influence the liquidity transaction extension agreed with our creditors,” adding: “We continue to work closely with them and have their support.
“The group of class A creditors are offering to provide the £3bn of debt on a “super senior” basis, putting it ahead of all existing debt in an insolvency or “special administration” — a form of nationalisation.”
An update released by Thames Water last Friday on its proposed Liquidity Extension Transaction said under new funding the company will have the opportunity to obtain up to £3 billion in super senior funding.
The interest charged would be 9.75 per cent a year under the creditors’ new proposal – significantly higher than market rates for most loans.
The £3 billion super senior funding comprises an initial tranche of £1.5 billion which has been fully backstopped by certain creditors pursuant to a backstop agreement . The update says:
“Other Class A and Class B Debt Providers will have the opportunity to participate in the backstop arrangements up until 11 November 2024.”
Backstop providers will be entitled to a backstop fee of up to 3.5% (1.5% payable to the primary backstop providers; 2.0% payable to the secondary backstop providers and the primary backstop providers). Other Class A and Class B Debt providers will be offered the ability to participate in the super senior funding pro-rata to their debt holdings through voting on the Restructuring Plan in accordance with its terms.
S&P previously announced on 25th September that it had lowered its issue ratings on the class A and class B debt, which are based on the 'ccc' stand-alone credit profile (SACP), to 'CCC+' and 'CCC-', respectively, from 'BB' and 'B' previously. The ratings agency also assigned a negative outlook to both the class A and class B debt.
This followed the announcement by Thames Water Utilities Finance PLC (Thames Water) on 20th September 2024 that its liquidity sources only cover its liquidity needs until December 2024, unless it obtains senior creditors' approval to release £0.38 billion of cash reserved under its financing covenants and unless it can draw on its £0.42 billion revolving credit facility (RCF) line. S&P described this announcement as "contrary to our previous expectation in July, based on the company's disclosure, that liquidity would last the company through May 2025."
S&P's announcement on 25th September also stated:
"We believe Thames Water is now facing an acute near-term liquidity shortfall, and that, without any material positive developments, the issuer will likely restructure its debt within the next 12 months, which we would likely consider a default....
"We have revised our assessment of Thames Water's liquidity to weak from less than adequate and management and governance to negative from moderately negative, in line with our view of deficiencies in the liquidity risk management."
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