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Announcement:

Moody's: Thames Water ratings unchanged following proposed changes to MTN Programme

03 Aug 2012

London, 03 August 2012 -- Moody's Investors Service has today said that the Baa1 corporate family rating ("CFR") of Thames Water Utilities Limited ("TWUL"), together with the ratings of the various classes of debt issued by its financing subsidiaries, Thames Water Utilities Finance Limited ("TWUF") and Thames Water Utilities Cayman Finance Limited ("TWUCF), are unchanged following the company's proposal to reduce the minimum rating required for the roles of Account Bank and Standstill Cash Manager under the company's GBP10.0 billion Multicurrency Programme (the "MTN Programme"). The MTN Programme itself is not rated by Moody's, but the rating agency currently rates all of the debt that has been issued, being Class A Debt (A3) and Class B Debt (Baa3). The outlook on all of the ratings is stable.

The assigned ratings are unaffected on the basis that (i) if the proposal to reduce the minimum rating is accepted, the risk of a failure by the Account Bank or Standstill Cash Manager would increase but nevertheless remains low; (ii) Moody's expects the cost for TWUL of any failure by these entities to be small; (iii) the company is well positioned in the Baa1 rating category, with a degree of headroom against its financial covenants; and (iv) the Standstill Cash Manager has a role only after a default by TWUL.

The proposed changes to the terms of the MTN Programme follow a deterioration in the credit worthiness of National Westminster Bank Plc ("NatWest", A3/Prime-2, negative) and The Royal Bank of Scotland Plc (A3/Prime-2, negative) which act as Account Bank and Standstill Cash Manager, respectively, under TWUL's financing structure. Subject to creditor consent, TWUL intends to amend (i) the Account Bank Agreement ("ABA"), so that the minimum rating level applicable to the Account Bank will be Prime-2 rather than Prime-1; and (ii) the Master Definitions Agreement ("MDA") and Common Terms Agreement ("CTA") so that the minimum rating for the Standstill Cash Manager will be Prime-2 rather than Prime-1. The MDA, CTA and ABA form part of the terms of the MTN Programme.

As discussed in a July 2012 Special Comment, Highly leveraged issuers largely insulated from weakened bank counterparty creditworthiness, none of the UK's highly leveraged infrastructure and utility issuers rated by Moody's currently have a significant reliance -- in terms of creditor protection -- on a single counterparty. Furthermore, ratings are generally at a level which can tolerate a modest increase in counterparty risk. Accordingly, issuers' ratings should be able to accommodate some deterioration in counterparty creditworthiness provided that they maintain a diversified exposure and, more generally, counterparty requirements consistent with prudent investment-grade corporate policies.

In considering the impact of changes in bank counterparty creditworthiness on highly-leveraged infrastructure and utility issuers, Moody's assesses the likelihood of the loss of the facility or service provided by the relevant institution(s), the consequences for the issuer and its ability to accommodate the same.

Whilst the credit standing of NatWest has deteriorated, the risk of it failing to fulfil its obligations as Account Bank remains low. At the same time, the likely financial impact on TWUL of any such failure would be modest -- average overnight balances at the bank are less than GBP1 million. Furthermore, the company continues to maintain headroom against the 85% debt to Regulatory Capital Value ("RCV") trigger level under the terms of the MTN Programme, with senior debt to RCV of 78.3% as at 31 March 2012 (according to the compliance certificate and before Moody's standard adjustments).

The role of Standstill Cash Manager is only relevant following a default under the terms of the MTN Programme and once the issuer is in a standstill (please refer to Moody's Pre-Sale Report for further detail of the transaction arrangements), when the bank will assume the role of cash manager. The probability of such a default is currently viewed as low. Moreover, the role of the Standstill Cash Manager is to assume control of the various bank accounts and hence the credit exposure to the appointed entity (in this capacity) is limited.

TWUL is the largest of the ten water and sewerage companies (WaSCs) in England and Wales by both RCV and number of customers served. The company provides drinking water to around 8.8 million customers and sewage treatment for a residential population of around 14 million in London and the Thames Valley.

Neil Griffiths-Lambeth
MD - Infrastructure Finance
Corporate Finance Group
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
Corporate Finance Group
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: Thames Water ratings unchanged following proposed changes to MTN Programme
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