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I AGREE
11 Feb 2014
Affirms ratings of senior secured notes
London, 11 February 2014 -- Moody's Investors Service has today changed to negative from stable
the outlook on the senior secured notes issued by Thames Water (Kemble)
Finance PLC (Kemble Finance). Concurrently, Moody's
has affirmed the B1 rating of the senior secured notes issued by Kemble
Finance.
The negative outlook reflects the risk that the ongoing price review for
the UK water industry, which will set tariffs for the five-year
period commencing 1 April 2015 (AMP6), will result in reduced financial
flexibility and capacity to meet debt service obligations.
RATINGS RATIONALE
Kemble Finance is a financing subsidiary of Kemble Water Finance Limited
(Kemble), a holding companies for Thames Water Utilities Ltd.
(Thames Water, Baa1 stable corporate family rating). Guidance
issued by Ofwat on 27 January 2014 suggests that allowed returns for the
UK water sector and, therefore, Thames Water will likely fall
from the current 5.1% to 3.85% (vanilla real)
from the start of the next five year regulatory period in April 2015.
Today's outlook change reflects the increased likelihood that cash
flow generation at Thames Water will be curtailed by a challenging regulatory
price review, which Moody's expects to significantly reduce
the amount of dividends being upstreamed to the Kemble holding company
level.
Whilst Moody's expects Kemble Finance to remain in a position to
meet its debt service payments , the assigned negative outlook reflects
the increased risk exposure to cash flow shortages should Thames Water
be faced with additional pressures, such as low inflation,
operational underperformance or cost overruns in their capex programme.
Moody's rating of the Kemble Finance notes is a function of (1) the credit
quality of the Kemble group; (2) the priority position in relation
to operating cash flows as well as recovery proceeds in a default scenario
pertaining to creditors at the operating company, Thames Water,
resulting in the deeply subordinated position of the Kemble Finance Notes;
and (3) the terms of the Kemble Finance Programme.
Moody's considers the consolidated credit quality of the Kemble
group to be consistent with a rating at the bottom of the Baa range.
The B1 rating assigned to Kemble Finance's GBP400 million 7.75%
senior secured notes due January 2019 (the Kemble Finance notes) reflects
(1) the low business risk profile of Thames Water, as the monopoly
provider of water and wastewater services in its area; (2) the stable
and transparent regulatory framework for the water sector in England and
Wales; (3) the high level of gearing at Thames Water and other debt
in the group including the Kemble Finance notes (debt can increase up
to 92.5% of Thames Water's RCV before a distribution lock-up
comes into effect); (4) the terms of the ring-fenced,
highly-leveraged, financing structure previously executed
by Thames Water (the Thames Water Programme); (5) the large capital
investment programme planned by Thames Water for the current regulatory
period; and (6) the terms of the Kemble Finance Programme including
a cash trapping provision.
The current ratings and negative outlook factor in the additional pressure
from the ongoing price review for the UK water industry, which will
set tariffs for the five-year period commencing 1 April 2015 (AMP6).
Although the proposed reduction in the allowed return is a credit negative,
Moody's believes that Thames Water will be able to absorb the challenges
of a tough price review within their current ratings. However,
equity returns will fall and the companies' future financial flexibility
to offset additional cash flow stresses will be limited.
Reduced dividend flows will result in declining cash inflows for Kemble,
and could ultimately lead to debt service shortfalls. Whilst Moody's
believe that this risk may only materialise in a downside scenario,
the additional risk of reduced financial headroom to withstand additional
shocks at the operating company level and the resulting impact on distributions
to Kemble is reflected in a negative outlook. Moody's expects
further clarity on the ongoing price review, with companies updating
certain aspects of their business plans and the regulator finalising incentive
packages over the coming months. The rating agency believes that
the final regulatory package will provide sufficient certainty on the
potential financial flexibility at the operating company level and the
resulting headroom for distributions to the Kemble holding company.
At that point, Moody's will also assess shareholder's
strategy on future dividend requirements or other potential measures to
maintain credit quality at Kemble.
WHAT COULD CHANGE THE RATING UP/DOWN
Given the current negative outlook, there is no upgrade potential.
The outlook could be stabilised, if it becomes clear, by the
time of the final price determination in December 2014, that Thames
Water is unlikely to be materially constrained in its ability to upstream
sufficient dividend payments to cover Kemble Finance's debt service
requirements.
Negative pressure on the Kemble Finance notes could follow a material
deterioration in the group's financial metrics such that dividend
lock-ups at the Thames Water level are more likely to be breached
(under the terms of the Thames Water Programme, there is a distribution
lock-up at the operating company if (1) Class A RCV gearing or
Senior (Class A and Class B) RCV gearing exceeds 75% or 85%
respectively; or (2) Class A Adjusted Interest Cover Ratio or Senior
Adjusted Interest Cover Ratio falls below 1.30x or 1.10x,
respectively). Such deterioration could be the result of serious
underperformance in operating or capital expenditure at Thames Water,
or adverse macro-economic developments, including deflation.
Negative funding conditions, particularly in the light of the refinancing
of the Kemble Finance notes towards the end of AMP6, or adverse
changes in the regulatory framework or structure of the water sector in
England and Wales may also cause downward rating pressure at Kemble Finance.
Finally, Moody's notes that it would likely strain the credit profile
of Thames Water (and hence Kemble) if Thames Water were required to deliver
the main construction works associated with the Thames Tideway Tunnel
(estimated construction cost GBP4.1 billion). The rating
agency believes that this scenario is unlikely due to the UK government's
ongoing consultation for appointing a specified infrastructure provider,
but an incremental risk related to Thames Water's involvement with
the Thames Tideway Tunnel project may remain.
PRINCIPAL METHODOLOGY
The principal methodology used in this rating was Global Regulated Water
Utilities published in December 2009. Please see the Credit Policy
page on www.moodys.com for a copy of this methodology.
Thames Water (Kemble) Finance PLC is the financing subsidiary of Kemble
Water Finance Limited, an intermediate holding company in the Thames
Water Group. The principal operating subsidiary in the group is
Thames Water Utilities Ltd., a regulated WaSC operating in
London and the Thames Valley area. Thames Water is the largest
of the ten WaSCs in England and Wales by both RCV and the number of customers
served. Thames Water 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. Kemble Water
Finance Limited is ultimately owned by a consortium led by Macquarie's
European Infrastructure Funds.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
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support provider's credit rating. For provisional ratings,
this announcement provides certain 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.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
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review.
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.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Stefanie Voelz
Vice President – Senior Analyst
Infrastructure 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
Infrastructure 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 changes to negative outlook on Thames Water (Kemble) Notes
No Related Data.
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