Fitch might cut Kemble Water

Fitch Ratings said it placed Kemble Water Finance Ltd.’s BB- long-term issuer default rating and BB senior secured rating on rating watch negative following the announcement of a £120 million regulatory penalty.

The agency also placed the BB ratings of Thames Water (Kemble) Finance plc's £400 million and £175 million senior secured bond issues, which are guaranteed by Kemble Water, on negative watch.

Fitch said the negative watch reflects financial profile pressure stemming from the £120 million penalty imposed on Thames Water Utilities Ltd. (Thames Water), the operating company beneath Kemble Water and the only source of Kemble Water's cash flows.

Of the £120 million, £55 million relates to automatic penalties, with a further £65 million of customer refunds. Fitch said the penalty adds to the rating pressure we already anticipate from the tougher price control starting in fiscal year 2021 and could reduce Kemble Water's debt service capacity to below a level commensurate with the rating.

The agency added that the negative watch also factors in the regulator's concern about inadequate systems of control over leakage reduction performance at a board level, although it recognizes the significant recent changes at the board, with the new chairman leading a full governance review.

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