Global Water Intelligence (GWI)

Moody’s warns two UK water plcs over PR19 gearing

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Source: Global Water Intelligence (GWI)

Yorkshire Water and Southern Water may need to reduce their gearing 12 months before the next pricing review to maintain their current credit ratings, Moody’s has warned.

While the rating agency affirmed its current Baa2 corporate family ratings on both companies, it said their higher than average leverage – close to 80% of regulated asset value – and relatively high cost of debt (3.1% for index-linked and 5.1% for nominal fixed-rate in Southern’s case, 2.4% and 6.0% in Yorkshire’s) makes them vulnerable to a lower allowable cost of capital from 2020-2025.

If current interest rates prevail, Moody’s suggested that Ofwat could cut WACC by a full percentage point from the present 3.6%. Pressure on interest cover ratios might then oblige the companies to cut gearing to maintain credit quality, and senior analyst Stefanie Voelz said they would need to do this about a year ahead of Ofwat’s final determinations in late 2019.

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