Southern Water pushed closer to default as Moody’s cuts debt to junk

A downgrade in Southern Water’s credit rating to junk status has pushed the debt-laden water utility closer to default.
Southern Water, which is controlled by Macquarie Asset Management, had the status of its bonds lowered from Baa3 to Ba1 by Moody’s, one notch below investment grade status, under a review by the agency of the UK’s embattled water industry.
The ratings cut reflected “a history of material operational and financial underperformance by Southern Water and the risk that this will extend well into the next regulatory period”, Moody’s said.
The downgrade puts the water company, which supplies 4.7 million customers in the southeast of England and the Isle of Wight, at the risk of a technical default in its debt as one of the covenants on its bonds is triggered if it loses its investment grade status with two credit rating agencies.
Last month S&P reduced Southern Water’s credit rating to BBB, one notch above junk, after the company raised £300 million in debt at a coupon of 7.75 per cent, higher than had been envisaged by Ofwat, the regulator.
The downgrade may also cast doubt over the company’s ability to raise at least £650 million in equity from its existing investors and £3.8 billion in new debt, which the company has set out in its business plan for the next regulatory period running from 2025 to 2030. Ofwat will make a so-called “final determination” on the utility’s plan next month.
Southern Water’s net debt pile stood at £6.2 billion at the end of March, which equated to gearing of 70 per cent. To maintain gearing at that level, Moody’s said that it estimated a larger equity injection might be needed.
“Regulatory penalties are contributing to increasing cash flow volatility and weaker financial metrics, particularly for companies with a poor performance track record, such as Southern Water,” the rating agency said.
The downgrade adds to the increased scrutiny faced by the privatised sector, which has been criticised for its environmental failings including water leakages and sewage dumping in rivers and seas.
In 2021, Southern Water was fined £90 million by Ofwat for deliberately dumping sewage, which at the time was the biggest fine ever levied on a water company by the regulator.
Stuart Ledger, chief financial officer at Southern Water, said that the downgrade reflected the “growing challenges and uncertainty faced by all companies operating in the UK water and wastewater sector”.
He added: “Ofwat’s final determination on 19 December should help to alleviate much of the uncertainty around the sector and enable us to continue to improve our services for customers, with the support of our shareholders and lenders.”
Macquarie, which owns about 82 per cent of the company, was also the previous controller of Thames Water, which is in the process of negotiating an emergency £3 billion loan with creditors to avert a renationalisation.
Thames Water, which is Britain’s largest water and wastewater company, has warned that it risks running out of cash by Christmas if it is unable to secure lifeline funding as it also attempts to raise £3 billion in new equity from investors. The company’s debt pile is expected to have reached £17.9 billion by April. The company has lost the confidence of the credit rating agencies and in March its nine international investors refused to inject more funds, calling Thames “uninvestable”, and wrote off their investments
Moody’s said Southern Water had “good” liquidity, including £513 million in cash and access to a £350 million revolving credit facility that matures in 2027.
The company has put forward an 84 per cent increase in bills to £772 between next year and 2030, the highest in the sector.