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Announcement:

Moody's Disclosures on Credit Ratings of Thames Water Utilities Ltd.

17 Sep 2012

London, 17 September 2012 -- The following release represents Moody's Investors Service's summary credit opinion on Thames Water Utilities Ltd. and includes certain regulatory disclosures regarding its ratings. This release does not constitute any change in Moody's ratings or rating rationale for Thames Water Utilities Limited and its affiliates.

Moody's current ratings on Thames Water Utilities Limited its affiliates are:

Thames Water Utilities Limited (TWUL)

LT Corporate Family Rating of Baa1

Thames Water Utilities Finance Limited

Backed Senior Secured Class A rating of A3

Backed Senior Unsecured MTN program rating of (P)Baa1

Backed Senior Unsecured MTN rating of Baa1

Thames Water Utilities Cayman Finance Limited (TWUCF)

Backed Senior Secured Class A rating of A3

Backed Subordinate Class B rating of Baa3

Thames Water (Kemble) Finance PLC (Kemble)

Backed Senior Secured rating of B1

RATINGS RATIONALE

Moody's maintains a corporate family rating (CFR) of Baa1 with stable outlook on TWUL reflecting (i) the company's low business risk profile as the monopoly provider of essential water and sewerage services; (ii) stable returns under a transparent and predictable regulatory framework; (iii) a high level of gearing; and (iv) the creditor protections incorporated within the company's financing structure.

A corporate family rating is an opinion on the expected loss associated with a company's financial obligations assuming that it has a single class of debt and is a single consolidated legal entity. The Baa1 CFR is in line with the corporate family ratings assigned in two of the three comparable transactions in the UK water sector, Anglian Water and Yorkshire Water, and one notch above that for Southern Water (the latter was downgraded in July 2011 - please refer to the associated press release for further detail). Like its peers, TWUL's credit quality is constrained by the expectation that the company will maintain a highly leveraged financial structure and by its exposure to refinancing risk, i.e. dependence upon continued market access to fund ongoing capital expenditure and the risk of adverse financial market conditions that may prevent TWUL from funding its very large capex programme or refinancing its debt on reasonable terms. The rating consolidates the legal and financial obligations of TWUL, TWUF and TWUCF (both financing subsidiaries) and Thames Water Utilities Holdings Limited (a holding company), which together constitute the ring-fenced TWU Financing Group as defined under the terms and conditions of its MTN programme (the TWUL MTN Programme) and factors in the associated structural enhancements.

The A3 rating of the Class A Bonds issued under the TWUL MTN Programme reflects the strength of the debt protection measures for this class of bonds and other pari passu indebtedness (together, the Class A Debt), the senior position in the cash waterfall and post any enforcement of security. The rating also, however, factors in the subordinated Class B Debt (Class B Bonds and other pari passu debt) which, whilst it is contractually subordinated, serves to reduce the operator's financial flexibility. Downgrade or default of the Class B Debt could have an impact on the viability of the company's funding model as a whole since the inability to raise additional Class B Debt in the future could undermine the capital structure and affect the credit quality of the senior debt.

The Baa3 rating of the Class B Bonds reflects the same default probability as factored into the rating of the Class A Debt but also Moody's expectation of a heightened loss severity for the Class B Debt following any default, given its subordinated position.

The B1 rating assigned to the GBP400 million notes issued by Kemble (a financing subsidiary of Kemble Water Finance Limited, a holding company for TWUL) under its GBP1.0 billion Guaranteed Secured Medium Term Note Programme (the Kemble Notes), reflects (i) the low business risk profile of TWUL, as the monopoly provider of water and wastewater services in its area; (ii) the stable and transparent regulatory framework for the water sector in England and Wales; (iii) the high level of gearing at TWUL and other debt in the group (debt can increase up to 92.5% of TWUL's RCV before a distribution lock-up comes into effect); (iv) the terms of the TWUL MTN Programme; (v) the large capital investment programme planned by TWUL for the current regulatory period; and (vi) the terms of the Kemble MTN programme including a cash trapping provision.

WHAT COULD CHANGE THE RATING UP/DOWN

TWUF and TWUCF

The stable outlook on the ratings reflects Moody's expectation that TWUL's financing structure should be relatively resilient to downside scenarios due to the cash trapping triggers designed to ensure that cash is retained in the company if certain ratio thresholds are breached. Such cash could then be used to absorb the effect of possible downsides.

Given the company's funding structure and Moody's expectation that TWUL will maintain leverage close to the maximum level permitted by its financial covenants, there will be limited potential for an upgrade of its ratings. Upward rating pressure would require a material and permanent improvement in debt protection measures.

Negative pressure on the ratings could derive from (i) an unexpected, severe deterioration in operating performance that results in TWUL remaining persistently in breach of the distribution lock-up triggers; (ii) a material change in the regulatory framework for the UK water sector leading to a significant increase in TWUL's business risk; (iii) unforeseen funding difficulties; and (iv) TWUL being required to deliver the main part of the proposed Thames Tunnel.

Kemble

The stable outlook for the Kemble Notes reflects Moody's view that the transaction is reasonably resilient to downside sensitivities. Given the high leverage at TWUL, the additional debt at Kemble and Moody's expectation that there will be only limited de-leveraging over the life of the Kemble Notes, there will be little potential for an upgrade.

Under the terms of the TWUL MTN Programme, there is a distribution lock-up at the operating company if (i) Class A RCV gearing or Senior (Class A and Class B) RCV gearing exceeds 75% or 85% respectively; or (ii) Class A Adjusted ICR or Senior Adjusted ICR falls below 1.30x or 1.10x respectively. A material deterioration in these financial metrics, compared to forecasts and such that the trigger levels appeared more likely to be breached, would result in negative rating pressure for the Kemble Notes. Such deterioration could be the result of serious underperformance in operating or capital expenditure at TWUL, or adverse macro-economic developments, including deflation. Negative funding conditions or adverse changes in the regulatory framework or structure of the water sector in England and Wales may also cause downward rating pressure.

Again, we note that it would likely strain the credit standing of TWUL and hence Kemble if TWUL were to be required to deliver the main Thames Tunnel (estimated construction cost GBP4.1 billion). We consider, however, that this is unlikely.

The principal methodology used in these ratings was Moody's global Rating Methodology for Regulated Water Utilities published in December 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare each of the ratings are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entities or their related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Neil Griffiths-Lambeth
Senior Vice President
Infrustructure Finance
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Monica Merli
MD - Infrastructure Finance
Infrustructure Finance
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Disclosures on Credit Ratings of Thames Water Utilities Ltd.
No Related Data.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND/OR ITS CREDIT RATINGS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY'S (COLLECTIVELY, "PUBLICATIONS") MAY INCLUDE SUCH  CURRENT OPINIONS. MOODY'S INVESTORS SERVICE DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE MOODY'S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY'S INVESTORS SERVICE CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS ("ASSESSMENTS"), AND  OTHER OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY'S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY'S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND  PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND  PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES  ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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