Moody's Ratings has downgraded Thames Water Utilities Ltd.'s (Thames Water) Probability of Default (PDR) rating to D-PD from Ca-PD - the rating action coincides with the effective date of Thames Water's restructuring plan announced by the company on 21 February 2025.

Moody’s said it regards the restructuring plan to be a distressed exchange, and hence a default under its definitions. An amendment or extension of credit terms that results in a loss relative to the original promise to pay constitutes a distressed exchange.

Rationale for Probability Of Default rating

The restructuring plan extends the final maturities and scheduled amortization payments of all existing debt obligations by two years, as well as structurally subordinating all existing creditors behind a soon-to-be-issued £1.5 billion super senior tranche (with a further £1.5 billion accessible later this year).

The effective date of the restructuring plan followings the sanctioning of the restructuring plan by the High Court on 18 February 2025. Certain dissenting creditors have appealed the decision, with an appeal hearing due to conclude by 13 March 2025. All actions taken by Thames Water to implement the restructuring plan prior to the conclusion of the appeal must be reversible in case the appeal is successful.

The ratings agency said Thames Water's Corporate Family Rating (CFR) reflects the challenges in Ofwat's final determination for the regulatory period running from 1 April 2025 to 30 March 2030, as well as Moody’s expectation of haircuts for existing creditors either through a further restructuring process within the next 12 months or as part of a special administration process.

While the restructuring and the upcoming super senior issuance provides the company with emergency liquidity, according to Moody’s the company will only establish a more sustainable capital structure and funding position after a second debt restructuring, expected to take place later this year and involving the raise of new equity.

The senior secured Caa3 rating of the Class A bonds issued by Thames Water's finance subsidiary, in line with the CFR, reflects their senior ranking in the cashflow waterfall. The C rating of the Class B bonds reflects Moody’s expectation of a heightened expected loss severity for the Class B lenders, “given their deeply subordinated position” in the cash flow waterfall.

Rating outlook - "upgrade of ratings is unlikely in the near term"

Moody’s said that Thames Water's outlook is stable, reflecting that it will take time to establish a more sustainable capital structure, which will ultimately determine recovery for senior lenders. The currently expected recovery rate is unlikely to change in the short term and an upgrade of the ratings is unlikely in the near term.

However, upward pressure could arise in the medium to long term if there was a substantial deleveraging, either as a result of a significant equity injection or following a debt restructuring process.

Alternatively, Thames Water's ratings, specifically its CFR or senior secured Class A debt ratings, could be downgraded further if creditors incurred more significant losses than embedded within current ratings.