Water reform to hit credit ratings, warns Moody’s

Water companies' credit ratings could take a hit as reforms to the upstream water market create financial challenges that hit, Moody’s has warned.

The credit rating agency warned potential upstream changes post 2020 could hit the regulatory capital value and the revenues of the companies, and have a negative knock-on effect to their credit ratings, potentially increasing financing costs.

Changes, such as the potential reforms to the water and wastewater treatment regulatory regime and the introduction of partial upstream competition, could have a “significant impact” according to Moody’s.

Alongside this, the credit agency warns that other changes being contemplated by Ofwat, such as changing the benchmark inflation index from the retail price index to the retail price index “may also have negative credit implications”.

In the shorter term, Moody’s vice president senior analyst Stefanie Voelz said the outlook for the sector remains challenging, but stable.

She said: “While companies will have less scope for operational and financial outperformance over the coming five years, we anticipate they will manage their financial and dividend policies to maintain credit quality.”

Voelz added that the higher leverage companies have altered the financial covenant to allow them to preserve the credit quality, at least for the current price control period.

However, she warned: “Creditor protections incorporated within their financing structures may not be effective to maintain credit quality in the face of significant reform.”