Fitch downgrades Southern Water

Fitch downgraded Southern Water’s rating on 19 November to BBB- from BBB, with a Rating Watch Negative.

The agency said the downgrade represents challenging financing conditions and the higher likelihood of a documentary event of default, given the prospect of Southern failing to maintain two investment grade ratings.

Fitch has a particular concern about the £1.6bn of long-dated derivative financial instruments, of which £400m falls due for repayment in March 2025. These super senior swaps rank ahead of A rated bonds.This is despite Southern Water successfully raising premium-priced seven year debt financing this month.

Southern is asking for the highest enhancement totex increase of any company in the sector and continues to underperform in many clean and waste water metrics, raising the prospect of significant financial penalties in AMP8.

Without significant improvement to its final determination, Fitch is concerned that Southern will not be able to attract equity finance to underpin its operational and environmental improvement plans.