Thames downgraded despite £1.5bn injection

Ratings agency S&P has downgraded Thames Water, citing operational performance, high leverage, a heavy investment plan and current economic environment for the step down in debt class.

The agency said the commitment of an additional £1.5 billion spend by shareholders of the country’s largest water company was not expected to deliver significant deleveraging during this AMP cycle.

S&P lowered its class A debt rating to BBB from BBB+ and its class B ratings to BB+ from BBB-.

Thames is in the second year of an eight-year turnaround that includes planned investments of £11.5 billion during the current price review period. S&P said the impact of this plan together with high inflation rates will weigh on the company’s financial metrics until the end of the regulatory period in 2025 but will be beneficial in the longer term.

The agency’s stable outlook is based on the assumption that metrics will improve over the remaining half of AMP7 to the end of March 2025.

S&P said a near-term improvement in Thames’ credit metrics would depend on any further measures by the company’s owners to shore up financial resilience, for which there is “broad shareholder commitment”,  however the timing of any additional support remains unclear.

When current investment plans materialise, S&P said the stronger asset base and better operating performance was expected to deliver improved leverage metrics.

On Thames’ turnaround, S&P said operating performance during 2021/22 showed clear signs of improvement, with 60% of the annual targets being met in the second year of AMP7. Despite a 43% reduction in complaints and a decline in pollution incidents the company missed its commitment targets for these key metrics.

A Thames Water spokesperson said: “We’re in the early stages of an eight-year turnaround plan which we’re delivering at pace. We’re investing heavily in support of our plan and our operational and financial performance is improving but it is a plan for the long-term, not short-term fixes. Like everyone, we’re impacted by the higher inflation at present, but as a regulated utility, our business has a degree of in-built operational and financial protection given the inflation-linked nature of our revenues and asset base.”

Since joining Thames as chief executive, Sarah Bentley has pinpointed customer service and operations as two core areas to improve within the turnaround plan. Political, public and media attention on pollution incidents has driven a focus on improving waterways and minimising the risk of harm from combined sewer overflows (CSOs).