REG - SW (Finance) I PLC - Equity Raise, Ratings and Trigger Events

AMPAnnouncement

07/07/2023 17:00

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RNS Number : 3937F  SW (Finance) I PLC  07 July 2023

7 July 2023

 

SW (FINANCE) I PLC

CORPORATE UPDATE: EQUITY RAISE, RATINGS AND TRIGGER EVENTS

 

·    Southern Water turnaround makes good initial progress

·    Shareholders, including funds managed by Macquarie Asset Management,
intend to invest an additional £550 million into the Southern Water group

Annual Report and Financial Statements

SW (Finance) I Plc (the "Company") announces that Southern Water Services
Limited ("Southern Water") has today published its annual report and financial
statements for the year ended 31 March 2023. They are available here:
https://www.southernwater.co.uk/our-performance/reports/annual-reporting
(https://www.southernwater.co.uk/our-performance/reports/annual-reporting)

 

Intention to raise an additional £550 million of equity capital and Southern
Water corporate update

In September 2021, funds managed by Macquarie Asset Management invested £1.1
billion of equity into Southern Water and its holding companies ("Southern
Water group" or "the Group"). This recapitalisation by a new majority
shareholder facilitated Southern Water announcing £2 billion of investment in
its network during the current regulatory period (2020-25). This investment
programme is in excess of the regulatory funding that Southern Water has
received and is equivalent to circa £1,000 per household in its catchment
area.

With this additional investment and the leadership of a new executive team,
Southern Water is making progress on its Turnaround Plan 1  (#_ftn1) which is
focused on ensuring a reliable supply of water for its customers; protecting
and improving the health of rivers and seas by building capacity and
resilience at its waste-water treatment works and sewer network; making its
customer service easy and trusted; and becoming an industry-leader in health
and safety. Southern Water is making good progress and it expects a 2-star
Environmental Performance Assessment rating by the Environment Agency for
2022, which compares to 1-star for 2021. Southern Water recognises it has
further to go, and its Turnaround Plan aims to reach a 3-star EPA rating for
2025.

As with many companies, Southern Water has faced significant cost pressures
over the last 18 months, including above-inflation increases for energy, costs
for the maintenance and upgrade of its network, and higher funding costs even
with a significant de-leveraging in 2021. Furthermore, Southern Water has
ambition to go further in its Turnaround Plan. As such, Southern Water now
intends to invest £3 billion in its network during the current regulatory
period, equivalent to circa £1,500 per household in its catchment area. Under
the current regulatory framework, water companies are not able to fully
recover these significant cost increases within a regulatory period.

As such, to maintain the momentum of its Turnaround Plan, Southern Water has
engaged with its shareholders to seek an additional £550 million of equity
funding for the Southern Water group of which £375m will be invested as
equity into Southern Water's regulated entity and £175m into its holding
companies. Southern Water expects this equity raise will successfully conclude
by the end of October 2023, with participation by funds managed by Macquarie
Asset Management and potentially other existing shareholders. As the equity
process has not yet concluded, it has been disclosed as a material uncertainty
with respect to the Southern Water's going concern status in the annual report
and financial statements.

Southern Water group shareholders have not received any dividends since
September 2017. Although Southern Water's gearing remains well below 70%, it
does not anticipate paying a dividend for the remainder of this regulatory
period to March 2025. This decision is in line with a conservative
distribution policy.

Since the entry of a new majority shareholder in 2021, Southern Water's yield
on regulated equity is significantly lower than its peers, as well as the
guidance provided in the regulatory framework. As committed to by its new
majority shareholder, Southern Water has also completed the closure of its
Cayman Islands subsidiary.

Ratings Downgrade and Trigger Event

Southern Water is investing significantly in its Turnaround Plan and has
maintained a strong investment-grade credit rating. Together with the
significant cost pressures and higher funding costs, this results in a
material increase in forecast expenditure over and above the capital already
committed to finance network operational improvements as part of the
Turnaround Plan.

The planned £375 million equity injection into Southern Water will maintain a
prudent gearing ratio, consistent with the deleveraging of the Group since the
equity recapitalisation in 2021. Interest cover ratios are forecast to be
lower in this regulatory period due to the additional expenditure. Southern
Water expects that the interest cover ratios will normalise in the next
regulatory period.

The Company and Southern Water confirm that the Conformed Class A Adjusted ICR
for the Test Period ending 31 March 2023 will be below the Trigger Event level
of 1.30 (and is estimated to be below such level for the Test Periods ending
31 March 2024 and 31 March 2025) and the Conformed Class A Average Adjusted
ICR for the Rolling Average Period ending 31 March 2025 is estimated to be
below the Trigger Event level of 1.40.

The Company and Southern Water note the decision of Fitch announced earlier
today to downgrade the Class A Unwrapped Debt of the Company to BBB (Negative
Outlook) from BBB+ (Negative Outlook) as a result, inter alia, of the lower
interest cover ratios in AMP7. Southern Water remains committed to maintaining
a strong investment-grade credit rating in the medium-term.

As a consequence of the Fitch credit rating action, a credit rating downgrade
Trigger Event has occurred and the level of the Conformed Class A Adjusted ICR
and the Conformed Class A Average Adjusted ICR means that a financial ratio
Trigger Event will occur under the Company's financing arrangements. A Trigger
Event has certain specific consequences, which are designed to improve the
financial resilience of the Company and Southern Water, including by
prohibiting payment of dividends and placing restrictions on the incurrence of
certain Permitted Financial Indebtedness.

The Company and Southern Water will provide further updates, as appropriate.

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:              stuart.ledger@southernwater.co.uk
(mailto:stuart.ledger@southernwater.co.uk)

 

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or any other jurisdiction. This announcement does not constitute a prospectus
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END

 

 1  (#_ftnref1)
https://www.southernwater.co.uk/media/8235/6579_ofwat_company_turnaround_plan.pdf
(https://www.southernwater.co.uk/media/8235/6579_ofwat_company_turnaround_plan.pdf)

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