Thames Water suffers two more credit rating downgrades amid liquidity crisis

Thames Water has suffered two further credit rating downgrades after the troubled utility again turned its back on investors and creditors last week.

S&P Global Ratings and Moody’s downgraded their assessment of Thames’ £16bn of senior debt late on Wednesday following the group’s warning that it could run out of cash if creditors do not allow it to tap into its funding reserves.

Both agencies lowered their rating to the equivalent of CCC+, one of the lowest levels of “junk.”

Thames, which serves 15 million homes in London and the south-east, is facing a funding crisis that has left it on the brink of emergency nationalisation as it struggles under the weight of its debt.

Moody’s cited a “significantly tighter than expected liquidity position” in reference to Thames’ warning last week.

Similarly, S&P said the statement was “contrary” to its understanding of Thames’ liquidity as it assessed the utility’s “management and governance as negative.”

He warned that this “indicates that the company will run out of cash in December 2024” unless creditors agree to the group accessing its reserves, “instead of the liquidity period previously set by the company until May 2025.”

The agency, which is downgrading Thames for the second time in three months, said this would likely lead to a “distressed swap”, where creditors would agree to modify or extend terms that will result in a loss relative to the original deal.

He added: “In the medium term, failure to attract new equity financing may ultimately lead to a creditor-led debt restructuring or one imposed as part of a special administration process, if the company meets the criteria for a special administration to be called.”

When Thames lost its two mandatory investment-grade credit ratings in July, it was in breach of its licence.

Rather than taking enforcement action, industry watchdog Ofwat said the company could proceed with a series of “undertakings” designed to encourage rating agencies to restore investment grade status.

Ofwat is also expected to publish its final tariff settlement in December 2024 or January 2025, determining how much water companies will be able to charge customers.

Thames Water has asked the regulator to allow it to increase household bills by £18.99 a month (or 52 per cent) by 2030, but Ofwat’s draft determination said it could only increase bills by 23 per cent over the five years.

While Thames Water has the option to appeal, Moody’s warned that if the final determination “does not depart materially” from the “harsh” draft, the group could struggle to attract new investors.

Moody’s said: ‘The failure to attract new equity financing may ultimately lead to a creditor-directed debt restructuring or one imposed as part of a special administration process, if the company meets the criteria for the special administration to be called.’

‘Thames Water’s outlook remains negative, reflecting the risk that any potential creditor losses following a default could be greater than those incorporated in the current ratings.

‘A ratings upgrade is unlikely in the near term.’

A Thames Water spokesman said in a statement: “The rating agencies’ announcement is consistent with our liquidity position set out in our market statement last Friday.

‘We continue to operate in accordance with the commitments agreed with our regulator in July 2024 following the downgrade of our Class A debt rating to sub-investment grade and remain in contact with creditors to consider options for the extension of our liquidity runway.

‘Formal discussions with potential equity investors will begin in the coming weeks.’