(The following statement was released by the rating agency)
Jan 28 - Fitch Ratings has assigned Kelda Finance (No.2) Limited (Kelda) an Issuer Default Rating (IDR) of 'BB' and an expected senior secured debt rating of 'BB+(EXP)'. The Outlook on the IDR is Stable. Additionally, proposed senior secured notes to be issued by Kelda Finance (No.3) Limited (FinCo) are assigned a 'BB+(EXP)' rating. The final ratings are contingent on the receipt of the final documents conforming to the information reflected in the assignment of the expected ratings.
The proposed notes are expected to refinance all or some of the existing bank debt at Kelda, the intermediary holding company of FinCo. The notes are unconditionally guaranteed by Kelda and its parent, Kelda Finance (No.1) Limited. Consequently, Kelda's bank debt and, through the guarantee, FinCo's bond creditors totalling GBP270m and an undrawn GBP30m facility, rank pari passu with each other.
Kelda relies upon dividends from its regulated subsidiary, Yorkshire Water Services Limited (YWS or OpCo), a regulated water and wastewater company (WASC) in England. YWS's financing structure is rated 'A' for the class A debt and 'BBB+' for the class B debt with Stable Outlooks. See 'Fitch Affirms Yorkshire Water's Senior Secured Debt at 'A'/'BBB+'', dated 16 January 2013 at www.fitchratings.com.
- Rating Constrained by Subordination:
Kelda's bank debt and FinCo's guaranteed bondholders are subordinated to the rights of YWS's bondholders as reflected in the assigned ratings. Additionally, YWS' covenanted financing structure could limit the dividends it upstreams and there is a statutory (and contractual) limitation on the pledging of its assets to any creditors.
- Sole Cash Flow Source:
Kelda and FinCo's debt service relies upon dividends from YWS. OpCo's dividends could be constrained by higher-than-covenanted OpCo leverage, low annual RPI used to index revenue and the regulated asset value (thereby constraining debt capacity to pay dividends) and general cash flow demands such as capex.
- Low-Risk Regulatory Business Profile of YWS:
YWS operates in a low-risk regulated environment and has a stable cash flow profile. In addition, the regulatory framework for the current price-control period (AMP5) has removed volume risk by allowing water and sewer companies (WASCs) to recover tariff-basket revenue shortfalls due to lower volumes on a net-present value-neutral basis in the next price-control period. However, the probability of changes to the regulatory framework is embedded in YWS's current business risk profile.
- Supportive Financial Profile:
Fitch expects consolidated net adjusted debt (including Kelda's holding company and FinCo's guaranteed debt) to remain to end-Match 2015 (remainder of the current price-control period) below 90% of YWS' regulatory asset value (RAV). We expect the dividend cover (distributions from YWS relative to Kelda's debt service) to average 3.3x for the remainder of AMP5. The expected credit metrics are in line with rating guidelines for the assigned IDR and thus support the Stable Outlook on Kelda's IDR.
Sufficient Liquidity: Should dividends from YWS be disrupted, Kelda has a committed GBP30m revolving credit facility dedicated to Kelda's and FinCo's debt service, representing 18-months' interest. The debt maturity of Kelda's bank debt is 2017 and the bond maturity is expected to be in 2020.
RATING SENSITIVITY GUIDANCE:
Positive: Structural subordination embedded in the financing structure of Kelda and the level of leverage at YWS limits the potential for any positive rating action over the rating horizon.
Negative: Future developments that could lead to negative rating action include:
YWS Downgrade: downgrade of YWS's financing structure could result in a negative rating action for Kelda.
Additionally, a fall in the dividend cover ratio below 2.5x and an increase in consolidated net debt to RAV ratio to above 90% would likely result in a negative rating action.
Fitch may have provided another permissible service to the rated entity or its related third parties. Details of this service can be found on Fitch's website in the EU regulatory affairs page.
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