WATER COMPANIES learnt this week that they face a three month wait to find out whether or not their credit ratings are to be downgraded by ratings company Standard & Poor's.
The credit ratings agency considers that a combination of increasing negative cash flows and strict regulation of water prices is increasing risk for investors and lenders.
A downgrade in credit rating will make borrowing more expensive for water companies and investment in the sector less attractive for equity investors. This could force companies to raise prices further or cut spending on infrastructure.
The credit ratings agency said this week that the draft results of industry regulator Ofwat's periodic review will determine the need and extent of any downgrade. This review will be published in August.
'From a ratings perspective the UK water sector is in the midst of the most important tariff review that it has faced since privatisation, ' said the Standard & Poor's research.
Water companies are spending around £1.30 for every £1 in revenue taken in, according to industry body Water UK. These negative cash flows mean companies are now around 55% debt financed.
Since privatisation water firms have been very low risk with typical credit ratings of AA. This has deteriorated to A or A-. Standard & Poor's review could result in a sharper drop to BBB+ or BBB.
Ofwat has made it clear to both the City and the water industry that it will make efforts to mitigate the deteriorating credit ratings of companies.
According to Standard & Poor's, Ofwat can do this by allowing tariff increases, setting reasonable capital and operating efficiency targets and keeping the payback rate to investors competitive. The cost of capital is currently set at 5% by Ofwat.