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South Staffordshire Water Plc -- Moody's affirms South Staffs Water at Baa2; stable outlook

·15 min read

Rating Action: Moody's affirms South Staffs Water at Baa2; stable outlookGlobal Credit Research - 15 Dec 2021London, 15 December 2021 -- Moody's Investors Service (Moody's) has today affirmed the Baa2 senior unsecured debt rating of South Staffordshire Water Plc (South Staffs Water). The outlook remains stable.The rating action follows an announcement by the company's parent, South Staffordshire plc, that it will commit to a new financing structure for its regulated water business, intended to "solidify its credit quality". As part of the changes to the group structure, a new intermediate holding company, SSW Finance Limited (MidCo), will now directly own South Staffordshire Water Plc and the unregulated activities will remain allocated at subsidiaries of South Staffordshire Plc. [1]RATINGS RATIONALEToday's rating affirmation reflects that the new corporate and financing structure does not result in material changes to South Staffs Water's financial policy or leverage, with the primary protection for creditors against cash calls of the wider group companies linked to the financial covenants within the operating company's senior unsecured debt documentation.The introduction of a new intermediate holding company within the wider group's organisational structure will introduce a separate layer of financial covenants, mirroring certain ring-fencing covenants in South Staffs Water's senior unsecured bond documents. However, the MidCo structure only applies to MidCo creditors, which will be a smaller portion of the group's debt.Reflecting the MidCo covenant and security package, Moody's considers the consolidated credit quality of the new MidCo group to be broadly commensurate with a rating in the low-Baa category. However, the rating agency believes that the operating company's credit quality will be supported at the Baa2 level, because of (1) regulatory ring-fencing embedded within South Staffs Water's licence; and (2) South Staffs Water's long-standing track record of maintaining gearing no higher than 70% of the RCV, in line with Ofwat's assumptions for the water sector.The Baa2 rating is further supported by South Staffs Water's monopoly position as a provider of essential water services in the English Midlands and the City of Cambridge, a transparent regulatory regime underpinning relatively stable and predictable cash flows and strong operational performance.The Baa2 rating remains constrained by the company's small size and relatively inflexible long-dated financing structure, which increases risk exposure in an environment of falling returns.Moody's also notes that South Staffs Water's covenant package is less comprehensive than for most of its peers and primarily provides ring-fencing protection. Due to the lack of security and intercreditor arrangements and no explicit liquidity requirements, the covenant package does not currently provide any additional credit enhancement to the Baa2 rating. It is also insufficient to protect a rating level higher than the current Baa2 at the operating company in the context of a MidCo group with a credit quality commensurate with a low-Baa rating.RATING OUTLOOKThe outlook is stable, reflecting Moody's expectation that South Staffs Water will, under Moody's base case scenario, exhibit an Adjusted Interest Coverage Ratio (AICR) broadly within the 1.8-2.2x range (excluding the income from grants and contributions) and gearing around 63-68% over the AMP7 period. These ratios are well in line with the minimum guidance for a Baa2 rating, outlined below.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGAn upgrade of South Staffs Water's Baa2 rating is not currently anticipated given its position within a wider group in conjunction with its covenant package. Any potential rating upgrade would require a strengthening of the contractual or regulatory ring-fencing protections.Conversely, the rating could be downgraded if South Staffs Water's financial metrics were likely to deteriorate, such that gearing would increase above 80%, and AICR were to deteriorate below 1.5x, both on a persistent basis.Downward rating pressure could also arise from a significant increase in business risk for the sector as a result of legal or regulatory changes leading to a reduction in the stability and predictability of regulatory earnings, which is not offset by other credit-strengthening measures, or the company facing unforeseen funding difficulties.PRINCIPAL METHODOLOGYThe principal methodology used in this rating was Regulated Water Utilities published in June 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1121971. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.South Staffordshire Water Plc is the fourth-largest of six water-only companies in England and Wales by RCV, which stood around GBP403 million (including Cambridge Water) as at March 2021. The company provides water services to a population of nearly 1.3 million within an area of 1,500 square kilometres in the English Midlands and to around 0.3 million people in the city of Cambridge and the surrounding areas.The company is owned by a new intermediate holding company, SSW Finance plc (MidCo), which includes a debt structure with financial covenants that ring-fence against the wider South Staffordshire Plc group. South Staffordshire plc is ultimately owned 55.1% by long-term pension funds and institutional investors, advised and managed by Arjun Infrastructure Partners, and 44.9% controlled by Mitsubishi Corporation (A2 stable), through a direct 25% ownership stake and a 19% stake held by Mitsubishi HC Capital Inc. but managed by Mitsubishi Corporation.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.REFERENCES/CITATIONS[1] https://www.south-staffordshire.com/news_article/101221.aspPlease see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Stefanie Voelz VP - Senior Credit Officer Infrastructure Finance Group Moody's Investors Service Ltd. One Canada Square Canary Wharf London E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Paul Marty Senior Vice President/Manager Infrastructure Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. One Canada Square Canary Wharf London E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. 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