Ritika Janiya
Thames Water, Britain’s largest water company, is seriously in financial trouble. The S&P Global Ratings and Moody’s, both of which are major credit rating agencies, have judicially downgraded the debt ratings of the company within recent days. This financial debacle of Thames Water has sent alarm bells ringing because it seems to be struggling to stay afloat; many even fear that it may run out of cash soon.
Credit Ratings Take a Nosedive
The two largest ratings agencies on the creditworthiness of firms are S&P and Moody’s. Essentially, they are telling investors how safe or not it is to lend money to those firms. For Thames Water, unfortunately, both of them downgraded the company’s debt rating by five levels each-putting the firm into the “junk” category. That means? Well, quite simply, Thames Water is now very much considered a highly risky investment.
The rating agencies cut Thames Water’s debt rating to CCC+, which is the lowest they have. When companies are rated in the CCC+ class, it is a question of very high likelihood of default, where they may not be able to repay their debt. The Moody’s agency was no less harsh in its verdict, rating the company Caa1-a grade similarly low. Why? The two agencies believe that Thames Water is burning its cash reserves quickly and might soon run broke.
Cash Crunch: Run out of money by December?
Thames Water faces serious financial trouble. The group has earlier admitted that it would go broke by December this year if things didn’t change for the better. By the end of August, Thames Water had only £1.57bn on its books for future expenditure, much of which is already allocated to other interests. The company has been trying to renegotiate repayment terms with its lenders, but time is running out.
If Thames Water does not come up with a solution soon, it may be compelled into something known as a “special administration regime,” which is rather a euphemism for saying the government could take control of the company. This would, in a way, be considered renationalisation: Thames Water would temporarily act as a government-run enterprise just to keep it afloat.
Why Is Thames Water Struggling?
Thames Water has been in hot water for some time now. Pun intended, of course. Serving some 16 million people in and around London, the company’s operations have long had their share of problems. One of the most major issues plaguing Thames Water lies in its crumbling infrastructure-the old pipes that frequently leak and systems that utterly failed to stop sewage from dumping into rivers. These problems did not only tarnish Thames Water’s reputation but also placed enormous pressure on its coffers.
The water regulator in England and Wales, Ofwat, has already put the company into “special measures.” This action places Thames Water under close watch on all its operations. The company got the message: make those problems go away, or face even stiffer consequences.
What do the agencies say?
When S&P downgraded Thames Water’s debt rating this week, they expressed surprise at how quickly and badly the company’s finances had deteriorated. In July, they had expected Thames Water to have cash in hand to last until May next year. But last week, Thames Water warned it might run out of cash as early as December. S&P was blunt in its assessment: Thames Water is now facing what they call a “near-term liquidity shortfall,” meaning the company simply doesn’t have enough money to cover its immediate needs.
Unless there is some major positive development, S&P believes that Thames Water will likely need to restructure its debt within the next 12 months. Plainly speaking, this means Thames Water will probably need to renegotiate its loans or a way to decrease its debt, which for S&P will constitute a form of default.
Moody’s had a similar take. They claimed Thames Water’s financial situation was much tighter than they had initially anticipated; meanwhile, they downgraded their rating for the company’s debt five rungs. The prospects for new investments in Thames Water appear slender, Moody’s said. In this case, when there is no new money injected into the system, the company may end up declaring debt restructuring, and the creditors, who would be the people Thames Water owes cash to, may end up taking charge of the situation.
A Desperate Battle for Survival
Thames Water is already looking for a way to survive. It is negotiating with some of its big lenders to change the terms under which it can repay them. Even if they succeed, however, that would not solve all of Thames Water’s problems. Any deal would merely delay its demise, perhaps until spring of next year. That would be a best-case solution, at any rate-a temporary fix, not a cure.
What happens next is anyone’s guess. Without fresh equity investment – that is, new money from investors – Thames Water is staring down the barrel of possible insolvency. Insolvency is when a company can no longer pay its debts. If this happens, creditors might step in to force the company into some sort of restructuring or takeover.
What’s Thames Water Saying?
Despite the tenuous situation, Thames Water has been surprisingly tight-lipped in its public comment. It took the downgrades from S&P and Moody’s and said that the newly assigned credit ratings represent the company’s position at its current financial state. Thames Water also defended their statement that they are in close coordination with their creditors to think of a way forward. The company said that formal talks with new investors will begin in the coming weeks.
