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UK’s Southern Water Risks Downgrade to Junk by Moody’s

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Security fencing and public information posters near the preparations for the laying of a new outfall pipe from at Swalecliffe wastewater treatment works, operated by Southern Water Ltd., in Whitstable, UK, on Wednesday, July 24, 2024. The UK government will impose new rules on water companies in England and Wales in a bid to curb sewage spills into rivers and seas. (Chris J. Ratcliffe/Bloomberg)

(Bloomberg) -- Moody’s Ratings is considering a downgrade to junk for the senior debt of UK utility Southern Water, the latest sign that troubles at Thames Water could spill over into other parts of the country’s water sector. 

The ratings firm has placed the credit score of the Macquarie Asset Management-controlled company — currently one step above speculative grade — on review for a downgrade, according to a report on Tuesday. Moody’s expects UK water regulator Ofwat to enforce penalties and the need for greater investment than outlined in its business plan.

The move by Moody’s follows its downgrade of fellow utility Thames Water to junk last week. The downgrade means that Thames Water has breached the terms of its license, leading the company to ask regulators to help it avoid massive fines. 

“This change has no material impact on Southern Water,” said Stuart Ledger, chief financial officer of the company, in a statement on Tuesday. Ledger highlighted Southern Water’s “excellent liquidity position.”

A draft ruling by Ofwat earlier this month signals it would commit Southern Water to reduce its pollution or incur financial penalties, Moody’s analysts said. It also increases the risk that the company will continue to overspend.

Ledger said that the Moody’s report highlights some challenges in Ofwat’s draft ruling and that they “will be responding to Ofwat at the end of August.”

Macquarie Asset Management bought a majority stake in Southern Water in 2021. Macquarie previously bought Thames Water in 2006 and exited the business in 2017.

Moody’s is now estimating that Southern Water would have to raise £4.5 billion ($5.8 billion) of debt and equity in the years up to 2030, but said there is “no certainty” that the controlling shareholder would continue to inject money if decisions from the regulator increase the likelihood of “continued low returns.”

Macquarie has injected a total of £1.65 billion into Southern Water since September 2021. 

(Updates with comment from Southern Water CFO from fourth paragraph)

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