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Rating Action:

Moody's assigns (P)B1 rating to notes to be issued by Thames Water (Kemble) Finance PLC; stable outlook

28 Mar 2011

London, 28 March 2011 -- Moody's Investors Service has today assigned a provisional (P)B1 rating to the proposed GBP[400] million, [5]-year notes, (the "Notes") to be issued under the GBP1.0 billion Guaranteed Secured Medium Term Note Programme of Thames Water (Kemble) Finance PLC (the "Issuer"), a financing subsidiary of Kemble Water Finance Limited ("Kemble"). The outlook assigned to the rating is stable.

Moody's issues provisional ratings in advance of the final sale of securities and these ratings reflect Moody's preliminary credit opinion regarding the transaction only. Upon a conclusive review of the final documentation, Moody's will endeavour to assign definitive ratings to the Notes to be issued under the programme (the "Kemble Programme"). A definitive rating may differ from a provisional rating.

RATINGS RATIONALE

The rating of the Notes reflects (i) the low business risk profile of Kemble's principal subsidiary, Thames Water Utilities Limited ("TWUL", Baa1 Corporate Family Rating, stable outlook), 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 including the Notes; (iv) the terms of the ring-fenced, highly-leveraged, financing structure previously executed by TWUL (the "TWUL Programme"); (v) the large capital investment programme planned by TWUL for the current regulatory period; and (vi) the terms of the Kemble Programme including a cash trapping provision.

The consolidated credit quality of the Kemble group is considered to be consistent with a rating at the bottom of the Baa range. The rating of the Notes is a function of (i) the overall credit quality of the group and (ii) the deeply subordinated position of the instrument and high expected loss given default. The capital investment programme, expected to increase TWUL's Regulatory Capital Value by around 29% in real terms over the five-year regulatory period ending in March 2015, will require significant equity retention and so limit the operating company's ability to pay dividends. This is a credit negative for lenders to the Issuer, which will be reliant on such dividend payments to enable it to service its debts. With regard to expected loss, we note that lenders to TWUL have security over the shares in the water company and, if this were enforced, then the security provided to the holders of the Notes may have little or no value.

The Corporate Family Rating ("CFR") assigned to TWUL consolidates the legal and financial obligations of TWUL, Thames Water Utilities Finance Limited, Thames Water Utilities Cayman Finance Limited, Thames Water Utilities Cayman Finance Holdings Limited and Thames Water Utilities Holdings Limited, TWUL's immediate holding company, which together constitute the ring-fenced Thames Water Utilities Financing Group under the TWUL Programme. It also factors in the terms and structural enhancements within the TWUL Programme including the financial and other covenants, liquidity and reserve facilities to enable TWUL to meet its operating and debt service costs in a downside scenario, standstill provisions to reduce the risk of special administration and security over the shares in TWUL. There is also a distribution lock-up which would, if tripped, prevent the payment of dividends by TWUL and, whilst this would benefit creditors at TWUL, it would also deprive the Issuer of income that would ordinarily be used to meet its debt service obligations.

The proceeds of the Notes, together with GBP[350] million of new bank borrowings, will be used to re-finance existing bank facilities at Kemble. These facilities were originally put in place in 2006 to fund the acquisition of TWUL by a consortium led by Macquarie's European Infrastructure Funds.

The structure of the Kemble Programme ring fences Kemble's credit quality from companies above it in the wider Thames Water group although we note that other activities are limited. The terms do not, however, achieve any ratings uplift for creditor protections. Whilst, for example, it is the intention to maintain cash and facilities sufficient to cover 12 months debt service at the Issuer, there is no requirement to do so.

The stable outlook reflects Moody's view that the proposed transaction is reasonably resilient to downside sensitivities. Given the high leverage at TWUL, the additional debt at the Issuer and Moody's expectation that there will be only limited de-leveraging over the life of the Notes, there will be little potential for an upgrade. The rating could come under downward pressure in the event of (i) serious underperformance in operating or capital expenditure at TWUL; (ii) adverse macro-economic developments including deflation; (iii) negative funding conditions; or (iv) adverse changes in the regulatory framework or structure of the water sector in England and Wales.

The principal methodology used in this rating was Global Regulated Water Utilities published in December 2009.

Kemble, headquartered in Reading, is an intermediate holding company for Thames Water Utilities Limited, the largest of the ten water and sewerage companies ("WaSCs") in England and Wales by both Regulatory Capital Value and number of customers served.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating 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.

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Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

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London
Neil Griffiths-Lambeth
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Monica Merli
MD - Infrastructure Finance
Infrastructure Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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 assigns (P)B1 rating to notes to be issued by Thames Water (Kemble) Finance PLC; stable outlook
No Related Data.
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