(Bloomberg) -- Thames Water bonds dipped to some of their lowest levels on record after the UK’s water regulator ramped up its scrutiny of the utility and S&P Global Ratings said it could downgrade it to junk.
The bonds of Britain’s largest water utility were down across the board after it was put into a Turnaround Oversight Regime by regulator Ofwat to ensure Thames Water can fix chronic leaks and sewage spills. Ofwat also set a cost-of-equity range of 4.8%, less than the 5.7% that the utility had requested.
“This does little to reduce the risk that Thames won’t be able to attract the equity it needs to fund its plan,” said Paul Vickars, a senior credit analyst at Bloomberg Intelligence.
Worst hit were Thames Water’s lower-rated “Class B” bonds. A sterling-denominated May 2027 bond was down around 4 pence to a cash price of 51.6 pence, according to pricing compiled by Bloomberg, a new record low.
Even the higher-rated Class A bonds were down: a euro-denominated April 2027 note dropped to a new low of around 84.2 cents and a January 2031 bond was down nearly 2 cents to 81.7.
On Wednesday S&P placed Thames Water Utilities Finance’s Class A and Class B debt on CreditWatch with negative implications, a status that indicates the firm could lower the ratings in the coming weeks if it believes Thames Water doesn’t have adequate liquidity. The Class A debt currently has the lowest investment-grade rating.
S&P could also take a negative rating action if the regulator’s draft determination indicates a lack of constructive engagement between Ofwat and Thames Water, the firm said in a statement.
A downgrade would restrict Thames Water’s ability to raise new debt, “making Ofwat’s turnaround oversight plan for Thames look like a precursor to a financial restructuring,” Vickars said.
(Adds details on cost to equity, updates chart)
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