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Rating Action:

MOODY'S ASSIGNS (P)Aaa RATING TO GBP400 MILLION NOTES ISSUED BY FRESHWATER FINANCE PLC

29 Mar 2005

Approximately US$752 million of Long-Term Debt Instruments Affected

London, 29 March 2005 -- Moody's Investors Service has today assigned a provisional (P)Aaa rating to the new GBP400 million Class A Guaranteed Asset-Backed Fixed-Rate Notes due 2035 (the "Notes") to be issued by Freshwater Finance Plc ("Freshwater"). Freshwater is an Irish special purpose company which is incorporated for the purpose of repackaging debt securities. It may offer further issuance of limited-recourse debt securities which would be separately secured on ring-fenced collateral. At the same time, as the issuer of the Notes, Freshwater will also issue GBP2 million of Class B Asset-Backed Fixed-Rate Notes due 2035 (the "Class B Notes"). These will rank in point of security subordinate to the Notes and will not be rated by Moody's.

The (P)Aaa rating of the Notes is based solely on the guarantee of principal and interest provided by Ambac Assurance (U.K.) Limited (Aaa) ("Ambac"). Ambac will not guarantee the Class B Notes. The assigned rating is provisional and assumes that there will be no material variations to the draft legal documentation reviewed by Moody's and that these agreements are legally valid, binding and enforceable.

The Notes, Class B Notes and Ambac's obligation under the guarantee will be secured by inter alia (i) a newly issued GBP402 million Indexation Class A Unwrapped Bond due 2035 (the "Asset") to be issued by Anglian Water Services Financing Plc ("AWS Financing"), the funding vehicle for Anglian Water Services Limited ("AWS"), which in turn is the UK regulated water and wastewater utility. The Asset will be rated A3 by Moody's. The Notes will also be secured by (ii) a swap with HSBC Bank Plc [London Branch] which receives the amounts due under the Asset and pays the amounts due under the Notes, the Class B Notes and various expenses of Freshwater.

The Asset has been issued under AWS Financing's EUR10 billion Global Secured Medium-Term Note Programme, which is unconditionally and irrevocably guaranteed by, inter alia, AWS. The Asset ranks pari passu with other indebtedness of AWS Financing and AWS, and is designated as Class A debt under the programme's terms and conditions. The programme itself is not rated by Moody's, but the rating agency currently rates all issuance under the programme's bond classes as follows:

- Class A Wrapped bonds are rated Aaa based solely upon an unconditional and irrevocable guarantee of principal and interest by MBIA Assurance S.A.; the underlying rating for these bonds is A3.

- Class A Unwrapped bonds are rated A3.

- Class B Unwrapped bonds are rated Baa3.

Moody's also maintains a senior implied rating of Baa1 on AWS, which consolidates the legal and financial obligations of AWS, AWS Financing and the other ring-fenced entities in the AWS Financing Group. The rating additionally factors in the structural enhancements of the bond programme.

Moody's ratings of the various classes of debt issued under AWS Financing's programme reflect primarily (i) the stable and predictable nature of AWS's cash flows from its regulated water and wastewater operations under an established and stable regulatory framework; (ii) the highly leveraged financial structure adopted by the company with the refinancing transaction executed in July 2002 at the time of the initial bond issuance by AWS Financing; (iii) the structural enhancements of the bond covenant and security package, which include many features typical of whole business securitisations and reinforce the ring-fencing of AWS from the rest of its corporate family, which also comprises higher-risk non-regulated businesses; (iv) the guarantee of MBIA Assurance S.A. (where applicable); and (v) the relative priority of claim for the various classes of debt in the AWS Financing's cash flow waterfall.

Moody's understands that the maturity of the Asset in 2035 enables AWS and AWS Financing to remain in compliance with the limitations on debt maturity concentration under the bond covenants, which also take into account expected maturities due to coupon step-ups. The proceeds of the Asset will be principally used by AWS to finance their existing Debt Service Reserve Account and future capital expenditure. The Debt Service Reserve Account is a requirement of AWS and AWS Financing's debt issuance programme. Future capital expenditure, under regulatory assumptions, is expected to be in the region of GBP1.7 billion of expenditure (at outturn prices) over the next regulatory period from April 2005 to March 2010 ("AMP4"). The capital programme will be partially funded through cash flows and from new borrowings and, to a much lesser extent, retained equity.

In its final determinations for AMP4 published in December 2004, Ofwat, the UK water industry's economic regulator, allowed an average annual real increase in the price limits for AWS of 2.4%. The outcome of the price review for AMP4 was in line with Moody's assumptions at the time the ratings were first assigned to AWS's structured refinancing. Like most of its peers, AWS will face challenging efficiency assumptions incorporated by Ofwat in the price limits, particularly in respect of capital enhancements. However, Moody's believes that, with focused management, AWS should be able to meet the regulatory targets and that the risk of underperformance currently remains low.

Moody's notes that, after recent changes, the stated intention of management at AWS's ultimate holding company, LSE-listed awg Plc ("awg"), is to maintain some headroom between AWS's projected financial ratios and the covenant levels for restricted payments, which cover all distributions to shareholders. Moody's thus expects that AWS will exhibit (i) interest cover ratios after capital charges in excess of the average trigger levels for restricted payments of 1.4x for the Class A debt and 1.2x for the Class A and B debt; and (ii) ratios of net adjusted Class A debt to Regulated Asset Value of around 70% and of around 80% at the Class A and B debt level.

The stable outlook for the rating reflects Moody's expectation that AWS will continue to efficiently refinance debt maturing over the next regulatory period and maintain an adequate percentage of its debt on an index-linked basis. Moody's adds that a material and permanent improvement in debt protection measures beyond the ratio expectations mentioned above could exert positive pressure on the ratings. Conversely, the ratings could be negatively impacted by (i) an unexpectedly severe deterioration in operating performance that results in the company's debt protection measures remaining persistently in breach of the restricted payment covenants (at the average levels for the interest cover test mentioned above); (ii) unforeseen funding difficulties; or (iii) an unexpected and materially unfavourable change in the regulatory framework.

Freshwater Finance Plc is a special purpose company located in Ireland and established for the purpose of repackaging debt securities. Anglian Water Services Financing Plc is the finance subsidiary of Anglian Water Services Limited, which is headquartered in Huntingdon in the United Kingdom and is one of the largest of the ten water and wastewater utilities in England and Wales, with a turnover of GBP767 million in the financial year ended 31 March 2004.

Moody's issues provisional ratings in advance of the final sale of securities, and these ratings only represent Moody's preliminary opinion. Upon a conclusive review of the transaction and associated documentation, Moody's will endeavour to assign definitive ratings to the securities. A definitive rating may differ from a provisional rating.

London
Benedicte Pfister
Managing Director
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Matthew Blakeway-Phillips
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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