(Sept 26): Thames Water’s debt was further downgraded by two credit ratings agencies as the troubled utility faces a potential liquidity crunch sooner than expected.

S&P Global Inc and Moody’s Ratings both slashed the UK water provider’s Class A debt — deemed the safest — by five and six notches respectively, according to two separate statements published on Wednesday. They also downgraded the firm’s riskier Class B debt. 

The downgrades come after Thames Water said last week it is exploring options with its creditors to delay a cash crunch, including the release of reserves. That announcement indicated that the company’s cash shortfall may come as early as December, contrary to previous statements that it had enough liquidity to last until May.

Both ratings agencies cited the company’s apparent shift in position — and the possibility it could run out of cash sooner than they had expected — in the statements accompanying the downgrades.

Bonds issued by the company fell following the news, with its Class A notes due in 2058 dropping around two pence to 77.4 pence (RM4.27) at 13.57pm London time, according to Bloomberg pricing source CBBT. Its Class B bonds due in 2027 fell almost 2 pence to 16. They had been quoted at over 30 cents as recently as last week, before the company’s announcement.

Under the terms of the debt, £380 million of the cash must be held as reserves. If a majority of creditors can’t reach an agreement to release the reserves early, there would be a crunch point at the end of December, when the company would enter standstill.

Under that emergency scenario, Thames would gain access to the £380 million of cash, on top of an additional £550 million of credit lines.

If the company were to enter standstill, it would trigger an event of default under its debt documents, S&P analysts including Gustav Rydevik wrote in its report. 

Even with access to the extra facilities, Thames Water would only have sufficient liquidity resources to last until May, S&P said. The utility had previously said it could reach that date without needing to access these lines. 

“Management should have told the bondholders the full story months ago,” said Tim Whittaker, a research director at the EDHEC Infrastructure Institute. “This is going to make it harder to get a resolution without government-enforced administration as investors will have a hard time trusting management now.”

A spokesperson for Thames declined to comment.

S&P sees a default at Thames Water as likely over the next 12 months and a risk of a debt restructuring ahead of a potential equity injection. In fact, the company has said that it does not expect to receive funds in the form of equity ahead of the final determination by regulator Ofwat, expected at the earliest on Dec 19. 

“Thames Water must continue to pursue all options to seek further equity to fund its turnaround plan for the benefit of customers and the environment,” an Ofwat spokesperson said. “Safeguards are in place to ensure that services to customers are protected, regardless of issues faced by shareholders of Thames Water.”

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