REG - SW (Finance) I PLC - CORPORATE UPDATE: RATING AGENCY DOWNGRADES

Moody'sAnnouncement

19/11/2024 15:30

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RNS Number : 8405M  SW (Finance) I PLC  19 November 2024

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:              stuart.ledger@southernwater.co.uk

 

 

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