Water sector debt risks market crisis warns watchdog
Water utilities loaded with debt are at a growing risk of collapse as interest rates rise, argued David Black, chief executive of Ofwat.
The boss of the industry regulator revealed feared that utilities have piled on debt could go under, piling further pain on households at a time when bills are already soaring.
Black told The Sunday Times that Ofwat was keeping a close eye on the impact of rapid rate increases from the Bank of England, which could heap costs on highly leveraged water companies.
Commenting on the affects of interest rates, he said: “We tend to see the cost of poor investment grade debt, or poor-quality debt, go up faster than the cost of higher-rated debt. So, water companies that are in a poor financial position will experience escalating costs of debt faster than better-financed companies.”
Water companies have attracted widespread criticism for loading up on debt while paying large dividends to their shareholders — many of them based overseas — but failing to resolve leaks or sewage spills.
Ofwat has opened enforcement cases against six water companies in partnership with the Environmental Agency, amid concerns of unauthorised leaks into rivers.
Earlier this week, Ofwat revealed plans to clamp down on dividends, limiting pay-outs for companies with the lowest credit ratings.
It argues that its policy on curbing pay-outs to water company owners “will reinforce the link between performance and dividends.”
This follows Ofwat being granted new powers last year to clean-up the water sector.
The proposals will remain open for consultation until September 29.
Ofwat begins clean-up measures
Net debt in the water sector topped £56bn last year, and Black’s warnings raise the prospect of a Bulb Energy-style failure in the water industry.
The energy supplier collapsed last November, and fell into special administration, where it has been propped up by billions in taxpayer funds.
If a water company failed, it would also go through a comparable process.
One of the most indebted firms, Thames Water, took steps to secure its finances last month with a £1.5bn boost in equity from shareholders.
Earlier this month, the Environment Agency published a damning report, recommending that company directors should jailed if they fail to meet their responsibilities to clean up rivers.
Emma Boyd, the agency’s chairwoman, said performance on pollution had “hit a new low.”
She said: “Company directors let this happen. We plan to make it too painful for them to continue like this.”
The warning on rates comes as the Bank of England is expected to raise rates from 1.25 per cent by as much as 50 basis points, as it seeks to tame inflation that is running at 9.4 per cent.