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.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating 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.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
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used in determining ratings, further information on the meaning
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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
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Moody's assigns (P)B1 rating to notes to be issued by Thames Water (Kemble) Finance PLC; stable outlook
