CORPORATE UPDATE: RATING AGENCY DOWNGRADES

SW (FINANCE) I PLC

Released at 14:25 19 November 2024

RNS Number: 8405M

SW (Finance) I PLC

19 November 2024

19 November 2024

SW (FINANCE) I PLC (the "Company")

SOUTHERN WATER SERVICES LIMITED ("Southern Water" and together with the Company, the "Southern Water Group")

CORPORATE UPDATE: RATING AGENCY DOWNGRADES

Background

Southern Water continues to progress on its Turnaround Plan, which is due to conclude in 2025. During the current regulatory period (2020-2025), Southern Water has invested £3 billion in improving its network. This investment programme is in excess of the regulatory funding that Southern Water has received and is equivalent to circa £1,500 per household in its catchment area.

To support this, its majority shareholder, funds managed by Macquarie Asset Management, has invested £1.65 billion of equity into the Southern Water group since September 2021. No dividends have been paid to Southern Water's shareholders since 2017.

Southern Water has materially improved its operational performance since 2021, including a significant reduction in pollutions, sewer flooding and customer complaints, and a significant increase in water quality.

In October 2023, Southern Water submitted an ambitious business plan for 2025-30 ("AMP8") to Ofwat, with further updates in February 2024. This plan included another step-change in investment in water and waste-water to create additional capacity and resilience to deal with the challenges from climate change, population growth and new environmental legislation.

In July 2024, Ofwat published its Draft Determination. After carefully reviewing this, Southern Water, in line with the majority of its peers, concluded that the Draft Determination provided insufficient investment allowances, a cost of capital allowance below market, and set unrealistic performance commitments alongside a punitive penalty regime.

On 28 August 2024, Southern Water responded to Ofwat's Draft Determination with a revised business plan, including a further £650 million of equity support to be provided in AMP8, subject to Ofwat's Final Determination.

Credit Ratings Downgrades

Fitch Ratings has announced today that it has downgraded the Company's underlying senior secured class A rating from BBB to BBB-. This follows the announcement by (a) Moody's Ratings on 13 November 2024 that it has downgraded the Company's underlying senior secured class A ratings to Ba1 from Baa3 and (b) S&P Global Ratings on 31 October 2024 that it had downgraded the Company's underlying senior secured class A credit rating to BBB- from BBB.

As set out in their public sector-wide assessments, credit ratings agencies have changed their assessment of the stability and predictability of the regulatory environment for the UK water sector. The credit rating agencies have noted that their final view on the sector risk will be refreshed following the outcome of the Final Determination, which is anticipated to be a material improvement to the Draft Determination.

Southern Water has, as recognised by the credit ratings agencies, strong liquidity through to March 2026, having secured a total of £1.5 billion of new debt financing over the past 12 months, including a £300 million bond issue completed earlier this month. 

Engagement with creditors

Under the Southern Water Group's finance documentation, it is an event of default if the underlying credit rating of the Company's bonds, in each case as ascribed by any two of Fitch Ratings, Moody's Ratings and S&P Global Ratings is less than the minimum required for an investment grade credit rating. Southern Water is also required from a regulatory perspective to maintain two separate issuer credit ratings which are investment grade.

Southern Water intends to engage with its principal financing creditors who are eligible to vote under the Southern Water Group's financing documentation on amendments and waivers, with a view to mitigating the impact to the Southern Water Group if, as a result any further rating agency downgrades the Company's underlying senior secured class A credit rating would be rated less than investment grade by any two of Fitch Ratings, Moody's Ratings and S&P Global Ratings.  The event of default related to credit ratings is not a market-standard feature of utility structured financings and has not been included in subsequent similar financings established by Southern Water's peers.

In addition to its strong liquidity position, the Southern Water Group's financing documentation includes specific structural enhancements designed to enable the Southern Water Group to carry on its business in the ordinary course and in fulfilment of Southern Water's licence conditions, including a significant standstill period during which secured creditors restricted from taking any enforcement action against the Southern Water Group. Additionally, the Southern Water Group is, if required, able to draw on dedicated operating and maintenance and debt service reserve liquidity facilities to meet any shortfalls in operating cashflows for the funding of operating and capital maintenance spend and scheduled debt service during the continuation of the standstill period.

For further information, please contact Stuart Ledger (Group CFO) at:

Address:          Southern House, Yeoman Road, Worthing, BN13 3NX, United Kingdom

Tel:                  01903 272 056

Email:              [email protected]

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