Southern Water credit rating downgraded amid 'challenging funding conditions'

Southern Water has been hit with another credit rating downgrade as Fitch Ratings knocked down its creditworthiness to just one above junk status.

The move, announced on Tuesday, comes amid "challenging funding conditions" and a heightened risk of the utility firm defaulting on its debts. At the same time, Southern Water found itself being placed under "rating watch negative" by Fitch, suggesting further downgrades could be on the horizon.

This negative outlook is partly fuelled by doubts about whether industry regulator Ofwat will agree to Southern Water's proposed significant increase in consumer water bills over the next five years, which according to Fitch, places pressure on the company's financial health. While Southern Water has proposed an 84% hike in the average water bill, indications from Ofwat have pointed towards a more conservative cap of around 44%.

A definitive decision from the watchdog is expected in December. With more than £6bn in debts, Southern Water ranks as one of the UK's most indebted water companies after Thames Water.

Southern Water, which supplies 4.7 million people across the south and south-east of England, is controlled by Macquarie, the Australian investment bank. Macquarie was a major investor in Thames Water during the years when it also piled up billions of pounds worth of debt, which has led it to seek emergency funding in recent weeks to keep the company running.

Fitch has suggested that a positive outcome from Ofwat in December might ease some of the financial pressure and could result in the removal of the negative outlook. This follows Moody’s decision last week to downgrade Southern Water’s credit rating to junk, placing it below investment grade.

Stuart Ledger, CFO of Southern Water, commented: "The action by Fitch Ratings today, following a similar move by Moody’s Ratings earlier this month, reflects the ongoing challenges and uncertainty faced by all companies operating in the UK water and wastewater sector.

"Ofwat’s Final Determination on 19 December should help to alleviate much of the uncertainty around the sector and enable us to continue to improve our services for customers, with the support of our shareholders and lenders."

An Ofwat spokesperson remarked: "We note Southern Water’s engagement with creditors in respect of its financing documents.We will continue to engage with the company and closely monitor its progress as it delivers its turnaround plan to improve performance and financial resilience."