Thames Water on Brink of Default Amid Massive Debts and Infrastructure Crisis

S&P and Moody's have downgraded Thames Water's credit rating, highlighting its severe financial distress and imminent risk of default. The utility, burdened with £18 billion in debt, faces issues including sewage dumping and pipe decay. A special administration regime may be required without urgent financial assistance.

S&P and Moody's slashed the credit rating of Thames Water on Wednesday, with both firms warning that Britain's largest and most troubled water provider was fast running out of money and on the brink of default.

Heavily indebted Thames, which serves 16 million people in and around London, is at the center of a crisis over relentless sewage dumping, crumbling pipe networks, and immense debts. It warned last week that it was at risk of running out of money before the end of the year unless its major creditors approved emergency funding.

"We believe Thames Water is now facing an acute near-term liquidity shortfall," S&P said, cutting the rating on Thames' highest-ranked 'class A' and lower level 'class B' debt to 'CCC+' and 'CCC-', respectively, from 'BB' and 'B' previously. "We see a material risk of a debt restructuring, which we would consider akin to a default." Without a rescue plan, Britain's government and water regulator Ofwat are likely to need to put Thames into a so-called special administration regime (SAR), a form of renationalization. The crisis is now a major headache for the new Labour government, which is already facing financial pressures. International investors losing money on a flagship UK utility would be a major reputational scar.

S&P's peer Moody's also cut Thames' ratings and delivered a similar warning that one of the biggest defaults in UK history could be looming. Thames has around £18 billion ($24 billion) in total debt. "Inability to attract new equity funding may ultimately lead to a creditor-led debt restructuring or one that is imposed as part of a special administration process," Moody's said, slashing the firm's rating by a massive five notches, to 'Caa1' from 'Ba2'. Before July, it was "investment grade." Thames is seeking a £3.25 billion ($4.33 billion) equity injection over the next five years. However, its crisis means it is also in discussions about emergency help and hoping Ofwat will allow it to hike bills more than previously indicated. "Given the worsening liquidity situation and a potentially lengthy process to attract new equity funding, we believe that a distressed exchange over the coming months is now a highly likely scenario," Moody's stated. ($1 = 0.7511 pounds)

(With inputs from agencies.)