Fitch downgrades Thames Water holding company over debt repayment fears

Credit rating agency Fitch has downgraded a holding company of troubled UK water utility Thames Water over concerns about a loan refinancing due next April.

Fitch downgraded company Kemble Water Finance Limited’s debt to ‘CCC’ from ‘B’. The new rating is applied to debt which has a "very low margin of safety" with default a "real possibility".

The downgrade is in response to risk around the renegotiation of a £190m loan which must be refinanced in April 2024, at terms that “could be viewed as a distressed debt exchange” (DDE) Fitch said in a statement.

It also highlighted “rising liquidity pressure due to increased regulatory and political scrutiny" of a £37.5m dividend paid by Thames Water Utilities Limited to Kemble.

Industry regulator Ofwat is already considering whether to investigate Thames for a potential breach of its licence when it made the payout in October. The company operates under a byzantine structure of holding companies

Scrutiny of the utility intensified earlier this month when the Financial Times newspaper reported Thames Water had presented a £515m shareholder loan to Kemble, charging 8% interest, as fresh equity. Kemble, then disbursed £500m of the borrowed money down the chain of holding companies that own Thames Water into the regulated utility as equity.

Fitch said Kemble faced “material challenges beyond the next few months”, and that a strong operational turnaround at Thames Water would be needed “to improve profitability and the prospects for future dividend distribution to Kemble”.

"Equity contributions from shareholders in the five-year price control period ending March 2025 at the Thames Water Utilities Ltd (LWUL) level remain conditional and there is currently limited visibility on regulatory development and further shareholder support in the next five-year price control period ending March 2030."

"With Kemble's cash balance estimated at about £20m as of the end of November 2023, dividends from TWUL become even more critical. Kemble's annual interest burden stands at around £80m- 85m in FY24."

Fitch added the risk of regulatory cash-lock was "increasing, in our view".

Thames Water, which provides water and sewerage services to 15 million customers in and around London, is the most indebted company in the industry, owing £14bn, largely built up under the ownership of Australian merchant bank Macquarie between 2007 - 17. It has come in for severe criticism over its payment of hefty dividends to shareholders, failures to deal with leaks, rising bills and pollution of rivers through raw sewage discharges.

It is currently owned by Canadian pension fund Ontario Municipal Employees Retirement System, with 31.7%, the UK Universities Superannuation Scheme (19.71%), Infinity Investments (9.900%), British Columbia Investment Management Corporation (8.706%), British Telecom pension scheme manager Hermes GPE (8.7%), China Investment Corporation (8.7%) and others.

Reporting by Frank Prenesti for Sharecast.com