Southern Water’s debt has been downgraded to junk status by the credit rating agency Moody’s in a decision that underlines the precarious state of the UK water industry.
Moody’s said Southern’s “history of material operational and financial under-performance” could imperil its plan, announced last month, to borrow £4bn from investors.
The company, which supplies water and wastewater services to 4.7 million customers in Kent, Sussex, Hampshire and the Isle of Wight, blamed regulatory uncertainty over the UK water sector for the downgrade. It said there would be no effect on customers.
The British water industry is under severe pressure, as it faces rising costs on debts built up over decades since the companies were privatised. At the same time, politicians and regulators have increased pressure on the companies to increase investments in creaking infrastructure.
Dumping of raw sewage in rivers and the sea became a big political issue. Southern Water has paid millions of pounds of fines in recent years for deliberately pouring sewage into the sea.
Water companies are awaiting a decision from the regulator, Ofwat, on how far they can raise customer bills by hundreds of pounds to pay for upgrades, as well as servicing debts. That decision is due on 19 December, although water companies are preparing for extended legal challenges.
Southern is controlled by Macquarie, the Australian investment bank that played a key role in Thames Water over years when it accumulated billions of pounds of debt. Thames Water is in the process of seeking £3bn in emergency funding to prevent it being forced into nationalisation.
Moody’s downgraded Southern Water’s debt on Wednesday evening from the last of its investment-grade ratings, Baa3, to Ba1, or junk status, and said it remained on review for further downgrades. The move puts Southern on the verge of a technical default on some of its debt, which contains commitments to retain an investment-grade rating from two agencies, according to the Financial Times.
Southern said the rating downgrade would have “no impact on the services we provide to our customers”, citing its “strong liquidity position”, a reference to the cash it holds, rather than its water supplies. Indeed, the company has drawn up contingency plans to ship water by tanker from Norway if it faces shortages in the future. The plan is thought by UK regulators to reflect delays to programmes to supply southern England’s water itself.
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The company said it has raised more than £1.5bn of new debt financing over the past 12 months, as well as £1.6bn of equity investment since 2021.
Stuart Ledger, Southern’s chief financial officer, said: “The action by Moody’s Ratings today reflects the growing challenges and uncertainty faced by all companies operating in the UK water and wastewater sector. 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.”
