Thames Water says it is working with regulator as analysts eye nationalisation
Could the Moody’s downgrade be the signal for Thames Water to enter a special administration regime – a form of temporary nationalisation for utilities?
That is the message from some analysts. Reuters reported that Satish Pulle, credit analyst at Seaport Global, said:
Almost certainly it will mean special administration for the company.
But Thames Water said it is “business as usual”, and that it is working with the regulator on how to refinance the regulated company, Thames Water Utilities Limited. A spokespeson said:
TWUL alerted Ofwat to the possibility of potential credit rating downgrades in April 2024 and continues to work with Ofwat to maintain the ongoing financial resilience of the business. Management is engaging with investors and its creditors and remains committed to seeking new equity funding and exploring all options to extend its liquidity runway.
Increasing our financial resilience and securing an investible PR24 determination is a critical priority for the business. In the meantime, it’s business as usual for our customers and our teams on the ground who will continue to supply our services and remain focused on the delivery of our turnaround plan.
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The rating downgrade for Thames Water could itself cause direct problems. Ofwat requires water companies to be rated as “investment grade” by two separate agencies, or else face greater oversight.
S&P, a rival to Moody’s, said this month that Thames Water could lose its investment-grade BBB- rating, because it “might not be able to maintain adequate liquidity”.
(For a comparison of the arcane ratings systems used by the big three rating agencies, Wikipedia has a very handy table.)
Moody’s also said it has a negative outlook on Thames Water’s rating. There are two reasons given for this:
(1) the final determination expected later this year would deter existing or new shareholders from providing sufficient additional equity during the next regulatory period to allow the company to deliver its investment programme;
(2) in the absence of a pathway to future equity support, existing lenders may be reluctant to provide the company with the required flexibility to improve its immediate liquidity runway by raising new debt.
Water regulator Ofwat also has “challenging targets for operational performance” that could force Thames Water to pay £80m to £90m a year in penalities, Moody’s said.
Ominously, Moody’s said:
Main areas of penalties are linked to pollution events and sewer flooding.
And then there are likely another £20m in annual penalties for “weak service provision”.
Here are the reasons Moody’s has cited for its debt rating downgrade of Thames Water.
Thames Water has said it can keep going until May without raising more funding. Moody’s believes that Thames Water could extend its life a few more months until the July to September quarter by cutting investment or costs, but then it would be in trouble.
So what to do? The company that supplies water to London and the Thames Valley in south east England, so it should be attractive to investors. But it needs to invest heavily to meet regulatory requirements. It will either have to raise new equity, debt or use “liability management” (which could, for instance, involve asking for delays on repayments).
But Thames already has too much debt, which will mean existing creditors will have control over terms of new borrowing. Moody’s said they probably will not allow Thames to borrow more unless it finds new investment. Yet who would invest in a company that needs to spend £2.5bn just to get to where regulators think it should be?
Thames Water debt judged as "junk" by Moody's
Thames Water has had its credit rating downgraded to “junk” status by the Moody’s agency, in a move that will add to pressure on the English water company’s finances.
Moody’s said the company may struggle to find new investment after the regulator, Ofwat, imposed restrictions on the company this month.
It downgraded the rating from Baa3 to Ba2. Baa3 is the last tier of Moody’s ratings that counts as “investment grade”, a category that makes it easier to access funding. Ba2 is the second rating in “junk” status.
Thames Water’s previous owners loaded up on debt and extracted huge dividends. That has left the company struggling to fund the £2.5bn in investment it has said it needs to keep running adequately – and to start to address public disgust over sewage in British waterways.
Moody’s said:
We see elevated risk that existing or future equity investors may view the proposed risk and return profile as not sufficiently attractive to provide the sizeable equity requirement of at least GBP2.5 billion under Thames Water’s current business plan and likely more in the context of the proposed determination.
CrowdStrike pledges to make changes after Windows meltdown disaster
The company whose faulty software caused the global meltdown in many Windows computers has said it will make changes to the way it operates.
CrowdStrike said it would make future updates on a “staggered deployment strategy”, meaning that the cybersecurity company will roll them out gradually rather than to every computer at once, in an update on Wednesday.
It will also monitor the effects of updates more closely, and allow customers to chose when updates are installed.
The company provides businesses with protection against viruses and other malware, but it became a household name after an update to its virus definitions ended up making millions of computers unusable. That caused huge disruption to transport, including thousands of cancellations at Delta Air Lines, previously the US’s most reliable carrier.
CrowdStrike said it will also test updates to its “rapid response content” – the regularly updated list of virus definitions – in more ways, and it will:
Add additional validation checks to the content validator for rapid response content. A new check is in process to guard against this type of problematic content from being deployed in the future.
King Charles gains £45m pay rise
King Charles is set for a huge £45m pay rise with an increase of more than 50% in his official annual income, official accounts reveal.
Profits of £1.1bn from the crown estate – a percentage of which funds the monarchy – mean the sovereign grant, which supports the official duties of the royal family, will rise from £86m in 2024-25 to £132m in 2025-26, write the Guardian’s Caroline Davies and David Pegg.
The monarchy currently receives 12% of the crown estate profits to fund its work as well as to fund the 10-year, £369m renovation of Buckingham Palace. Royal aides said the increase will be used to complete the palace reservicing programme by 2027.
The sovereign grant will be reviewed in 2026-27 to reassess the amount handed over to the palace and ensure it is an “appropriate level”.
Royal accounts also show that the Prince of Wales received £23.6m income from the Duchy of Cornwall in his first full year after inheriting the land and property owning estate from his father.
You can read the full story here:
Shares in LVMH, the owner of fashion brands including Louis Vuitton, have dropped 4% in value after its profits dropped by 8%.
Sales rose by 1% year-on-year to €21bn, below the €21.6bn consensus expectation.
That disappointed analysts, and prompted a drop in fashion share prices across Europe. Reuters reported:
The earnings miss weighed on other luxury stocks, with Hermes down around 2% and Kering off 3%.
Analysts at Bank of America cut its estimates of sales and profits by between 4% and 8%. However, they noted:
Important not to lose sight of the big picture: structural growth, high barriers to entry, strong brands at sub-20x price/earnings ratio.
Shoplifting in England and Wales hits highest in 20 years of records
The number of shoplifting offences in England and Wales has risen to its highest in 20 years of records.
Shoplifting offences rose by 30% to 443,995 offences compared with 342,428 in the previous year, according to the Office for National Statistics’ latest crime numbers.
The British Retail Consortium, a lobby group, estimates that shoplifting costs UK businesses £3.3bn. It is awaiting details of a pledge by the Labour government to bring in stronger measures to tackle shoplifting in its Crime and Policing Bill.
Shoplifting had already reached its highest since records began in 2004, and has now risen further. Explanations for the increase differ, but some possible answers are thought to include the cost of living crisis and increasing targeting by organised gangs. (Those two forces may be related.)
Doug Lafferty, Aston Martin’s chief financial officer, said that the company will seek to make petrol engine cars until 2035.
There have been questions over whether the new Labour government will reinstate the ban on new petrol and diesel cars in the UK in 2030, after former prime minister Rishi Sunak delayed it until 2035. Labour committed to putting it back to 2030 in its manifesto.
However, Lafferty said the company hopes to benefit from allowances for smaller manufacturers to continue to sell cars up to 2035. He told reporters:
The current legislation allows for a derogation for small volume manufacturers, and we don’t see any deviation from that.
Lafferty also said the UK government should support international trade, but did not express a view on whether Labour should consider introducing tariffs on Chinese cars.
The EU and the US have brought in tariffs of up to 38.5% and 100% respectively in protectionist moves. That has raised some concerns that trade – particularly of electric vehicles – could be diverted to the UK, flooding the market. On the other hand, it the UK did respond it could draw retaliation by China, potentially harming exports.
Aston Martin sells about 7% of exports to mainland China, but it already pays tariffs of 15%, which are added to list prices. Lafferty said:
We export a lot of our products and everything they can do to support international trade would be positive.
If we need to deal with it, we’ll deal with it, but they [tariffs] already exist today.
Aston Martin shares rise as it expects strong second half despite big loss
Aston Martin has reported a drop in sales and increased losses for the first half of 2024, but the luxury carmaker said it expects a strong second half as new cars go on sale.
The FTSE 250 company’s share price rose 9% on Wednesday as it beat analyst expectations and promised an “exciting” second half.
Aston Martin’s first half losses rose by 52% to £2167m, while the number of cars sold to dealers fell by a third to 2,000. Yet it promised a pick-up in sales in the next six months.
The sportscar maker is launching its new Vantage sportscar and the DBX 707, an update of the sports utility vehicle that has played a key role in increased sales. Alongside its DB12 and Vanquish models, it means the carmaker has an all-new line-up.
Lawrence Stroll, the billionaire fashion mogul who took over Aston Martin in early 2020, said he believes the company now has “the newest and the strongest portfolio in the ultra-luxury segment”. He said the launch of the new sportscars – alongside the top-selling SUV – was the “pivotal moment” for the company after years of trying to turn it around.
Former Bentley boss Adrian Hallmark will take over as chief executive under Stroll, who is chair, in September.
Stroll said Aston Martin will start generating cash later this year, giving the benefits of heavy investment. He added:
We have a big third and fourth quarter coming up.
Reckitt Benckiser to sell off brands including Cillit Bang in revamp
Reckitt Benckiser is to sell off a portfolio of brands including household names including Air Wick, Calgon and Cillit Bang, and said it will review options for the infant formula business which has dragged it into disastrous lawsuits in the US.
The Dettol-to-Durex maker said it is to sell off its slower-growing homecare products business, which generates annual revenues of £1.9bn, by the end of next year.
The beleaguered company is also considering all options for its Mead Johnson Nutrition business, which in March saw a court in the US award $60m in damages to a woman whose premature baby died in intensive care after consuming the company’s Enfamil formula.
Reckitt Benckiser spent $18bn buying the US-listed maker of baby milk formula in 2017.
The company said:
These actions are the result of a thorough review conducted over the last nine months. This sharpened portfolio creates the opportunity to move to a simpler, faster and more efficient organisation.
Shares in Reckitt Benckiser rose as much as 5% in early trading on the news, although they remain down more than 23% over the last year. The company, which cut its sales growth target to between 1% and 3%, said that it wants to focus on “power brands” such as Strepsils, Durex, Vanish, Harpic and Dettol.
Matt Britzman, senior equity analyst at Hargreaves Lansdown, said:
Investors will be happy to see Reckitt streamline the business. News that the Mead Johnson business is also on the chopping block will be welcome. It’s been the subject of extensive litigation in the US, and while Reckitt has maintained stalwart support for innocence, it’s been an ongoing thorn in the side.
Rachel Reeves, the chancellor, has complained that Labour’s economic inheritance from the Conservative party is the worst since the second world war. That may or may not be true, but it seems a short-term certainty boost may be coming through.
Matthew Ryan, head of market strategy at Ebury, a financial services firm, said:
This morning’s business activity data will have provided welcome news to newly appointed PM Keir Starmer, remaining consistent with a UK economy that is growing at a solid, albeit far from spectacular, pace.
Today’s data supports our generally optimistic view on the UK economy, which we think appears primed for an outperformance relative to the rather subdued expectations in 2024. Business and consumer confidence should be propped up by the normalisation in rates of inflation, and the high likelihood of lower Bank of England interest rates, which we expect to start cutting in August. We also see a mild boost to demand from the removal of the election uncertainty and the possibility of closer UK-EU ties under the new Labour government.
It is not all gravy for the UK economy though. The Bank of England may have pause before cutting interest rates in August, particularly given internal arguments over where inflationary pressures are building.
Chris Williamson, chief business economist at S&P Global Market Intelligence, said:
Policymakers will likely take a cautious approach to loosening policy amid signs of inflationary pressures pivoting away from services towards manufacturing, where Red Sea shipping delays and higher freight prices are adding to costs again. The renewed hiring trend could also add to pay pressures, sustaining some stickiness of inflation in the coming months
Britain’s manufacturing and services sectors both reported stronger sales growth this month, according to the purchasing managers’ index (PMI) survey.
Survey compiler S&P Global said it was “the strongest increase in total new business since April 2023”.
The Labour party has long argued that it will offer stability to businesses, compared with the turmoil of the last eight years since the referendum on leaving the EU. After a landslide victory on 4 July, it appears that the economy will benefit – at least in the short term – from the end of uncertainty over the direction of the government.
S&P Global said:
Companies often commented on an improvement in market confidence and the securing of new contracts, following some reports of a pause in client spending decisions prior to the general election.
UK election triggers 'surge in demand' says PMI survey
The new UK government has been greeted by a “surge in demand” from British businesses, according to the purchasing managers’ index (PMI).
The UK manufacturing sector is enjoying the strongest growth in two years – in stark contrast to its German counterparts. The manufacturing index rose to 51.8 for July, up from 50.9 in June, according to data company S&P Global. Anything below the 50 mark on the index indicates a drop in activity, but above 50 indicates growth.
But the PMI survey’s compilers gave a very positive interpretation of the underlying data, saying businesses have reported increased optimism, hiring and demand.
Chris Williamson, chief business economist at S&P Global Market Intelligence, said:
The flash PMI survey data for July signal an encouraging start to the second half of the year, with output, order books and employment all growing at faster rates amid rebounding business confidence, while price pressures moderated.
The first post-election business survey paints a welcoming picture for the new government, with companies operating across manufacturing and services having gained optimism about the future, reporting a renewed surge in demand and taking on staff in greater numbers. Prices have meanwhile risen at their lowest rate for three and a half years, further raising the prospect of a summer rate cut.
Business confidence fell to a six-month low in June, but rebounded in July, and was only slightly below the two-year high seen in February. S&P Global said:
Manufacturing and services firms were alike in showing greater optimism towards future business activity, amid expectations of improving demand conditions, stronger business investment, interest rate cuts and political stability.
It is looking like a tricky time for the German economy. This graph shows how GDP contraction often follows close on the heels of negative readings in the purchasing managers’ index:
Not even the boost from the Euro 2024 football championships has been able to deliver Germany from weak growth. Competition from Chinese carmakers (who are dominating the electric car market) is a key problem.
Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said:
The elephant in the room is the various structural issues. With respect to the manufacturing sector, the main structural challenges include labour market shortages, an investment backlog in infrastructure, a lack of digitalization, and relatively high energy prices. However, the most significant factor impacting the German manufacturing sector is the increasing loss of global market share of German car and machinery producers to competitors in China. Unfortunately, this problem is here to stay.
Germany’s economic downturn is somewhat buffered by a still-growing service sector. However, the situation there is far from comfortable. Firms have even cut jobs, and outstanding business declined faster than in the previous month. Moreover, it appears that the mini boom in tourism, which could be associated with the European football championships, was already over in July as new export business in services shrank.
German manufacturing turmoil deepens
German business output dropped in July as the manufacturing sector’s woes deepened, to the surprise of economists who had predicted an improvement.
The manufacturing purchasing managers’ index (PMI), a widely followed measure of business activity, dropped from 45.1 points to 42.2, a nine-month low, according to data company S&P Global. Anything below the 50 mark on the index indicates a drop in activity.
The German services sector still reported an expansion in output, at 52 points, but the manufacturing weakness drove the composite reading down below 50.
Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, which sponsors the survey of executives, said he now expected German GDP to fall by 0.4% in the third quarter. He said:
This looks like a serious problem. Germany’s economy fell back into contraction territory, dragged down by a steep and dramatic fall in manufacturing output. The hope that this sector could benefit from a better global economic climate is vanishing into thin air.
While it is still early days and many data points are yet to come, the second half of the year is starting on a very weak note.
'Oscars of advertising' owner to be bought by FTSE 100 rival
Informa, the FTSE 100 events business, has made a £1.2bn cash offer for Ascential, which owns global conferences including Money20/20 and Cannes Lions, the “Oscars of advertising”.
Ascential recently completed the sale of its retail data operation WGSN to private equity group Apax for £700m, and its digital commerce business to global advertising group Omnicom for £740m.
The company, which employs about 700 people, said in March it intends to return £850m to shareholders following those sales.
Stephen Carter, the chief executive of Informa, said:
Informa is in the business of creating, nurturing and growing world class business-to-business brands. Lions and Money20/20 are outstanding examples of such brands. Combined, we can expand them into more sectors, accelerate growth and take advantage of new opportunities.
The broader FTSE 100 index has dropped by 0.42%, amid general stock market gloom across Europe.
Here are the opening snaps from Europe’s benchmark indices, via Reuters:
EUROPE’S STOXX 600 DOWN 0.7%
FRANCE’S CAC 40 DOWN 1.3%, SPAIN’S IBEX DOWN 0.3%
EURO STOXX INDEX DOWN 0.8%; EURO ZONE BLUE CHIPS DOWN 0.9%
GERMANY’S DAX DOWN 0.9%
Shares in easyJet have duly surged by 9% in the opening minutes of trading after it revealed a much more positive outlook than rival Ryanair for the summer.
That erases its losses for the week. Before today it was down 16% for the year; now that is back to 8%.
You can see the slump and the subsequent recovery in this share price chart, which shows its performance during July.
EasyJet positive after Ryanair gloom; Heathrow airport has first-half passenger record
Good morning, and welcome to our live, rolling coverage of business, economics and financial markets.
EasyJet has said it expects a “record-breaking summer” after the airline revealing a 16% jump in profits, in contrast to the weaker sales expected by Irish rival Ryanair.
The Irish carrier’s shares slumped by 17% on Monday after it shocked investors with a steep fall in profits and expectation of falling ticket prices. That drove other airlines down, including a 7% drop for easyJet.
The Ryanair surprise had hung over the Farnborough air show in Hampshire, where the global aviation industry has gathered for a biennial meeting. The aviation industry has mostly been in positive mood as it pushes to meet soaring global demand – although it has offered very little answer to how it will cut total carbon emissions in the coming decades.
Yet easyJet on Wednesday reported profits of £236m in the second quarter of 2024, up from £203m during the same period last year.
Johan Lundgren, chief executive of easyJet, said the company had seen “strong performance in the quarter”. He said:
This result was achieved despite Easter falling into March this year, demonstrating the continued importance of travel and this means we remain on track to deliver another record-breaking summer, taking us a step closer to our medium term targets.
EasyJet’s revenues rose by 11% year-on-year to £2.6bn, and it said it had already sold 1.5m more seats for the summer than at the same point last year.
Heathrow says 30 June was busiest day ever
London Heathrow airport has said it is enjoying an “exceptional start to the year” after a record number of people travelled through it in the first six months.
Europe’s busiest airport reported a 1% drop in revenues for the first half of 2024 to £1.7bn, but it said that 39.8m passengers flew to and from it.
30 June was the airport’s busiest day ever, with over 268,000 passengers travelling on over 1,300 flights.
The agenda
8:30am BST: Germany HCOB manufacturing purchasing managers’ index (PMI) flash reading (July; previous: 43.5 points; consensus: 44)
8:30am BST: Germany HCOB services PMI flash (July; prev.: 53.1; cons.: 44)
9am BST: Eurozone HCOB manufacturing PMI (July; prev.: 45.8; cons.: 46.1)
9am BST: Eurozone HCOB services PMI (July; prev.: 52.8; cons.: 53)
9:30am BST: UK S&P Global services PMI (July; prev.: 50.9; cons.: 51.1)
9:30am BST: UK S&P Global services PMI (July; prev.: 52.1; cons.: 52.5)
