Thames Water asked regulators to help it avoid massive fines after its most senior debt was downgraded to junk by Moody’s Ratings, adding to the financial pressure on Britain’s biggest water supplier.

Plans proposed this month by regulator Ofwat would make it harder for the struggling utility to raise new equity, Moody’s said on Wednesday in cutting its rating on the company’s top-ranked bonds. The downgrade means Thames Water may have breached the terms of its licence, which requires it to maintain two investment-grade ratings, and could now face fines of as much as 10% of its revenue. 

The Moody’s action adds to more than a year of turmoil at Thames Water, which provides drinking water and sewage services to a quarter of England, including London. Rising interest rates in 2022 put pressure on the indebted company, just as it faced mounting pressure to spend billions of pounds to fix chronic leaks and sewage spills.

To avoid enforcement action, Thames Water has asked Ofwat to instead consider company “undertakings”, according to a person familiar with the situation. That could mean Thames Water comes up with a remedial action plan, which if agreed to by Ofwat, would allow it to avoid hefty fines. The company declined to comment. 

S&P, which still has an investment-grade rating on the debt, said this month it was monitoring Thames Water Utilities Finance’s Class A and Class B debt for possible downgrade, which would exclude Thames Water’s top-rated debt from investment-grade indices.

Thames is at risk of running out of money by the end of May next year if it can’t find at least £2.5 billion in new equity. Its existing shareholders turned their back on the business at the end of March and last week Ofwat said it wanted to put Thames into special measures and rejected plans for a 43% bill hike by 2030.

Moody’s said Ofwat’s plans would make it harder for Thames to attract new money. And without any promise of new investment, Thames would struggle to get creditors to agree to increase its liquidity beyond May, it said. It downgraded senior secured debt of Thames Water Utilities Finance plc to Ba1, one notch into junk territory. Lower-level debt was downgraded to B3, and the corporate family rating to Ba2. The company’s credit outlook remains negative.

Thames Water said it warned Ofwat in April of the possibility of it being downgraded to junk after shareholders declared its business plan “uninvestible”. Parent company Kemble Water Holdings then defaulted on its debt.

Thames Water’s bonds on Wednesday fell between 3-4 cents on the euro or pence on the pound following the news, dropping further into distressed territory. A €650 million April 2027 bond, for example, dropped as much as four cents to a cash price of 69 cents. It was at 97 cents on the euro at the start of the year and 85 cents just two weeks ago.

In a statement on Wednesday, Thames said it was continuing to seek new equity investment and also was looking to build up more liquidity. 

A downgrade pushes up borrowing costs and limits access to capital, adding to the troubled company’s woes. 

“This downgrade reinforces our position that a comprehensive financial and operational turnaround in Thames’ operations is essential,” an Ofwat spokesperson said.

  - Bloomberg