Kelda Finance (No. 3) 'BB-' Ratings Withdrawn At The Company's Request

LONDON (S&P Global Ratings) March 25, 2020--Today, S&P Global Ratings withdrew its 'BB-' long-term issuer credit rating on Kelda Finance (No. 3) PLC (Kelda). At the time of the withdrawal, the outlook on the long-term issuer credit rating was negative.
Successful refinancing alleviates any near-term liquidity concerns.
Kelda successfully completed the refinancing of its £200 million bullet bond maturing in February 2020, spreading future maturities out to 2028. While this will limit future refinancing risks to a certain extent, in our view Kelda remains subject to risks related to its 18-month £80 million bank facility.
Uncertainty surrounding the outcome of a testing final determination and the Competition and Markets Authority (CMA) appeal continues to limit the visibility on Kelda's future role for Yorkshire Water Services Ltd. (YWS).
Kelda is the holding company of the U.K. water regulated company YWS. In February 2020, YWS asked the regulator Ofwat to refer its final determination of the 2019 price review to the CMA, with a decision likely over the next six to 12 months. The decision to appeal reflects the company's view that the final determination does not allow it to meet the long-term hurdles it faces beyond the next regulatory period, and its concerns that the final determination does not adequately capture customers' priorities. Our current base case does not assume any material changes on YWS' operating conditions during the next regulatory period, based on the outcome of the CMA's review.
In our current base case, we assume a gradual erosion of YWS' credit metrics to below our rating thresholds on both classes of debt (senior secured and subordinated) toward the end of the AMP7 regulatory period. While we expect upstream distributions from YWS to cover Kelda's interest costs over the next regulatory period, we note that the group expects to reflect those tougher operating conditions in its dividend policy by not paying its ultimate shareholder dividends, and by aspiring to reduce gearing toward 70% by the end of the next regulatory period, from the current 76.8%. We believe this will be difficult for YWS to achieve, and we cannot rule out potential additional capital injections from Kelda. That said, capital injections are not part of our base case at this stage.
Kelda's outlook was negative at the time of the rating withdrawal, reflecting the risk that leverage may increase if Kelda issues additional debt to finance capital injections. The negative outlook also reflects the refinancing risk regarding the 18-month £80 million bank facility maturing in mid-2021.
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