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Thames Water Bonds Dip as Ofwat, S&P Crank up the Pressure

Public information signs from Thames Water Ltd. on protective barriers surrounding water supply works in London, UK, on Monday, July 8, 2024. Thames Water is waiting on a key July 11 ruling from water regulator Ofwat on its next business plan, a decision which will set price controls for water utilities. (Chris Ratcliffe/Bloomberg)

(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)

©2024 Bloomberg L.P.

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