(Bloomberg) -- Southern Water Ltd. was downgraded to junk status by Moody’s Ratings and warned it could be cut further in light of the woes facing UK water and sewage providers as well as the company’s own weak track record.
The firm’s “history of material operational and financial underperformance” could continue over the coming five years and impact the potential raising of £4 billion ($5.1 billion) in new debt and at least £650 million of new equity, Moody’s said in a statement Wednesday.
The move is the latest setback for the UK’s cash-strapped water industry, which has come under intense scrutiny over safety concerns. Moody’s lowered Thames Water Utilities Ltd. — Britain’s biggest supplier — to junk territory in July after the company breached its license conditions. The utilities are grappling with a combination of high interest rates and public outrage over chronic leaks and sewage spills.
Following the downgrade, Southern Water bonds due 2026 fell about 2.7 pence on Thursday morning, according to pricing compiled by Bloomberg, to around 85 pence on the pound.
The supplier of more than two million people with water and sewage services in England remains on review for a further cut, with Moody’s stating that UK water regulator Ofwat is expected to slap Southern with “severe performance penalties and total expenditure allowances below the level needed to fund” its capital-spending plans.
Southern said in a statement posted on its website that the downgrade “will have no impact on the services we provide to our customers. As Moody’s acknowledges, we maintain a strong liquidity position. Indeed, earlier this month, we secured additional financing whilst we await Ofwat’s Final Determination on our ambitious 2025-30 business plan.”
Southern Water is seeking to lift bills by 84% between 2025 and 2030, while the average hike proposed across the industry is 40%.
In a filing released earlier this month Southern announced that it had raised new debt in the private placement market, consisting of £300 million across two tranches. The money comes with a hefty price tag. One of the tranches was priced at discount of 90 pence on the pound, meaning a yield of nearly 10% for the debt, Bloomberg calculations show.
Macquarie Asset Management bought a majority stake in Southern in 2021, promising Ofwat that it would reduce sewage spills and leaks. It has since invested £1.65 billion into the company to fund its turnaround plan.
Southern is already blocked from paying dividends to shareholders until at least 2025 after Fitch Ratings issued a downgrade last year. New Ofwat rules starting in 2025 mean dividend payments won’t restart unless Southern’s credit rating improves.
Moody’s decision puts Southern at a higher risk of breaching its license with Ofwat, which could lead to enforcement action and hefty fines.
Water and sewer companies in England and Wales need at least two investment grade credit ratings in order to remain within their license agreement with the regulator. S&P Global Ratings downgraded Southern to its lowest investment-grade rating two weeks ago and Fitch has the firm two steps above junk.
--With assistance from Giulia Morpurgo and Ronan Martin.
(Adds bond move in fourth paragraph, details of private placement in sixth)
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