Thames Water’s licence to supply water to London is in doubt again after a second credit rating agency downgraded its senior bonds to junk or sub-investment grade.
Thames’ licence stipulates it must have two investment grade ratings and it was already theoretically in breach after Moody’s downgraded last week.
That left just S&P, which yesterday too said it had downgraded Thames’s senior bonds to BB from BBB- or two notches below investment grade.
“We do not believe that Thames Water will have a remedy plan to cover its liquidity needs by 1.1x for the next 12 months before the autumn of 2024,” S&P said.
“In addition, the company is in breach of its current licence conditions.”
The agency added that if Thames defaults, lower or junior-tiered bondholders would likely lose all their money while senior bondholders are looking at 70% returns or 30% haircut.
Thames currently has debts of around £16.5bn with £1bn of loans that need refinancing by next year.
Shareholders comprising mostly pension, sovereign wealth and private equity funds have refused to put in more cash and in some cases have written off their investment entirely, with one describing the company as ‘uninvestable’.
Water regulator Ofwat said: “This latest downgrade further reinforces our position that a comprehensive financial and operational turnaround in Thames’s operations is essential.”
The regulator might yet give Thames some leeway on its licence given its size and the fact that it could cost the new government billions to renationalise.
The potential damage to investment in other water companies at a time when all have huge infrastructure upgrades planned is another concern.
Steve Reed, the environment secretary, this week said Thames Water would not be temporarily nationalised because it remains “financially viable”.
Under its current powers, Ofwat could fine Thames up to 10% of annual revenue for breaching its licence conditions.