SW (Finance) I PLC Equity Raise, Ratings and Trigger Events (3937F)

TIDM31HI

RNS Number : 3937F

SW (Finance) I PLC

07 July 2023

7 July 2023

SW (FINANCE) I PLC

CORPORATE UPDATE: EQUITY RAISE, RATINGS AND TRIGGER EVENTS

   --    Southern Water turnaround makes good initial progress 

-- Shareholders, including funds managed by Macquarie Asset Management, intend to invest an additional GBP550 million into the Southern Water group

Annual Report and Financial Statements

SW (Finance) I Plc (the " Company ") announces that Southern Water Services Limited (" Southern Water ") has today published its annual report and financial statements for the year ended 31 March 2023. They are available here: https://www.southernwater.co.uk/our-performance/reports/annual-reporting

Intention to raise an additional GBP550 million of equity capital and Southern Water corporate update

In September 2021, funds managed by Macquarie Asset Management invested GBP1.1 billion of equity into Southern Water and its holding companies (" Southern Water group " or " the Group "). This recapitalisation by a new majority shareholder facilitated Southern Water announcing GBP2 billion of investment in its network during the current regulatory period (2020-25). This investment programme is in excess of the regulatory funding that Southern Water has received and is equivalent to circa GBP1,000 per household in its catchment area.

With this additional investment and the leadership of a new executive team, Southern Water is making progress on its Turnaround Plan [1] which is focused on ensuring a reliable supply of water for its customers; protecting and improving the health of rivers and seas by building capacity and resilience at its waste-water treatment works and sewer network; making its customer service easy and trusted; and becoming an industry-leader in health and safety. Southern Water is making good progress and it expects a 2-star Environmental Performance Assessment rating by the Environment Agency for 2022, which compares to 1-star for 2021. Southern Water recognises it has further to go, and its Turnaround Plan aims to reach a 3-star EPA rating for 2025.

As with many companies, Southern Water has faced significant cost pressures over the last 18 months, including above-inflation increases for energy, costs for the maintenance and upgrade of its network, and higher funding costs even with a significant de-leveraging in 2021. Furthermore, Southern Water has ambition to go further in its Turnaround Plan. As such, Southern Water now intends to invest GBP3 billion in its network during the current regulatory period, equivalent to circa GBP1,500 per household in its catchment area. Under the current regulatory framework, water companies are not able to fully recover these significant cost increases within a regulatory period.

As such, to maintain the momentum of its Turnaround Plan, Southern Water has engaged with its shareholders to seek an additional GBP550 million of equity funding for the Southern Water group of which GBP375m will be invested as equity into Southern Water's regulated entity and GBP175m into its holding companies. Southern Water expects this equity raise will successfully conclude by the end of October 2023, with participation by funds managed by Macquarie Asset Management and potentially other existing shareholders. As the equity process has not yet concluded, it has been disclosed as a material uncertainty with respect to the Southern Water's going concern status in the annual report and financial statements.

Southern Water group shareholders have not received any dividends since September 2017. Although Southern Water's gearing remains well below 70%, it does not anticipate paying a dividend for the remainder of this regulatory period to March 2025. This decision is in line with a conservative distribution policy.

Since the entry of a new majority shareholder in 2021, Southern Water's yield on regulated equity is significantly lower than its peers, as well as the guidance provided in the regulatory framework. As committed to by its new majority shareholder, Southern Water has also completed the closure of its Cayman Islands subsidiary.

Ratings Downgrade and Trigger Event

Southern Water is investing significantly in its Turnaround Plan and has maintained a strong investment-grade credit rating. Together with the significant cost pressures and higher funding costs, this results in a material increase in forecast expenditure over and above the capital already committed to finance network operational improvements as part of the Turnaround Plan.

The planned GBP375 million equity injection into Southern Water will maintain a prudent gearing ratio, consistent with the deleveraging of the Group since the equity recapitalisation in 2021. Interest cover ratios are forecast to be lower in this regulatory period due to the additional expenditure. Southern Water expects that the interest cover ratios will normalise in the next regulatory period.

The Company and Southern Water confirm that the Conformed Class A Adjusted ICR for the Test Period ending 31 March 2023 will be below the Trigger Event level of 1.30 (and is estimated to be below such level for the Test Periods ending 31 March 2024 and 31 March 2025) and the Conformed Class A Average Adjusted ICR for the Rolling Average Period ending 31 March 2025 is estimated to be below the Trigger Event level of 1.40.

The Company and Southern Water note the decision of Fitch announced earlier today to downgrade the Class A Unwrapped Debt of the Company to BBB (Negative Outlook) from BBB+ (Negative Outlook) as a result, inter alia, of the lower interest cover ratios in AMP7. Southern Water remains committed to maintaining a strong investment-grade credit rating in the medium-term.

As a consequence of the Fitch credit rating action, a credit rating downgrade Trigger Event has occurred and the level of the Conformed Class A Adjusted ICR and the Conformed Class A Average Adjusted ICR means that a financial ratio Trigger Event will occur under the Company's financing arrangements. A Trigger Event has certain specific consequences, which are designed to improve the financial resilience of the Company and Southern Water, including by prohibiting payment of dividends and placing restrictions on the incurrence of certain Permitted Financial Indebtedness.

The Company and Southern Water will provide further updates, as appropriate.

For further information, please contact Stuart Ledger (Group CFO) at:

   Address:         Southern House, Yeoman Road, Worthing, BN13 3NX, United Kingdom 
   Tel:                  01903 272 056 
   Email:              [e-mail] 

DISCLAIMER - INTENDED ADDRESSEES

This announcement is a communication to the market. Nothing in this announcement constitutes an offer of securities for sale in the United States or any other jurisdiction. This announcement does not constitute a prospectus or a prospectus equivalent document.

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[1] https://www.southernwater.co.uk/media/8235/6579_ofwat_company_turnaround_plan.pdf

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July 07, 2023 10:47 ET (14:47 GMT)