S&P Global Ratings has downgraded Southern Water’s debt to BBB- “on challenging financing conditions” - the rating remains on CreditWatch with negative implications, where they were placed on 23rd August 2024.
The ratings agency commented:
“Amid soaring capital intensity, we believe Southern Water Services Ltd. will probably face persistently high financing costs to execute its business plan over the next regulatory period, from April 2025 to March 2030, likely well above its future regulatory allowances….
“The continuing CreditWatch placement reflects that we could lower our ratings on SW (Finance) I PLC's debt by one or two notches, after Ofwat publishes its final determination--currently scheduled for Dec. 19, 2024. This is based on what we identify as significant operational and financial challenges the group would face to execute its business plan for AMP8 considering its draft determination and representation. This downside risk also highlights a potential change in our perception of the supportiveness of the regulatory framework for U.K. regulatory water companies.”
S&P has lowered its rating on the senior secured debt issued by SWS' financing vehicle SW (Finance) I PLC to 'BBB-' from 'BBB'.
At the same time, it has affirmed its 'AA' issue credit rating on the senior secured debt guaranteed by Assured Guaranty UK Ltd. (AA/Stable/--), saying the outlook on this debt is stable. S&P also withdrew its 'BB+' issue rating on SWS' class B debt at the issuer's request - SWS has no outstanding class B debt.
According to the ratings agency, the water company is likely to face persistently high financing costs over the next regulatory period, probably well above its regulatory allowances.
S&P’s assessment continues:
“Recent transactions have highlighted a more direct risk of the group underperforming against its regulatory allowances over the next regulatory period. This was highlighted by a recent £300 million bond issuance at a significantly higher cost than assumed in Ofwat's cost-of-new-debt allowance in its draft determination of about 3.36% in real consumer price index including owner occupiers' housing costs (CPIH) terms, equivalent to about 6% in nominal terms as of September 2024.
“We believe that SWS is more exposed to underperformance than most of its peers given the pricing of recent transactions entered by other U.K. water companies. High financing costs will prove particularly challenging on the group's credit metrics amid significant funding needs as SWS' response to Ofwat's draft determination contains a total expenditure allowances request of about £9.4 billion to deliver its business plan for the next regulatory period.”
However, the ratings agency went on to say that access to the market and pricing could be improved significantly for the company, should Ofwat's final determination result in a more favorable outcome than the current draft determination.
Yesterday Southern Water issued a brief statement in response to the S&P rating, saying:
“We note the latest credit rating action by Standard & Poors. Southern Water retains its investment grade rating and is financially robust and resilient.
“We are still awaiting Ofwat’s Final Determination on our ambitious investment proposals for the next five years which will be supported by our shareholder.”
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