OREANDA-NEWS. Fitch Ratings has affirmed Osprey Acquisitions Limited's (Osprey) Long-Term Issuer Default Rating (IDR) at 'BB' and its senior secured rating at 'BB+'. The Outlook on the Long-Term IDR is Stable. Fitch has also affirmed the senior secured bond issued by Anglian Water (Osprey) Financing Plc (AWOF) at 'BB+'. The bond is guaranteed by Osprey, and is thus rated in line with Osprey's senior secured rating of 'BB+'.

The affirmation and stable outlook reflects the adequate dividend capacity of the operating company (OpCo) in comparison with the debt service requirements of Osprey, adequate credit metrics, and expected reduction of subordination for investors at Osprey.

The rating also takes into account the market-leading operational and regulatory performance of Anglian Water (see "Fitch Revises Anglian Water Outlooks to Stable; Affirms Ratings", published on 19 April 2016, at www.fitchratings.com), the main operating subsidiary of the group, as well as the structurally and contractually subordinated nature of the holding company financing at Osprey level.

Osprey is a holding company of Anglian Water Services Limited (Anglian Water or OpCo; A/BBB+/Stable), one of 10 appointed regulated water and sewerage companies (WaSC) in England and Wales. AWOF is the financing vehicle for Osprey, which is a holding company for businesses focused on the water sector, including ownership of Anglian Water - a regulated water and wastewater business.

KEY RATING DRIVERS
Adequate Dividend Cover, Reduced Subordination at Holdco
For the price review covering April 2015 to March 2020 (AMP6), Fitch forecasts average dividend cover of 3.7x and average post-maintenance and post-tax interest cover (PMICR) at around 1.1x. We expect subordination at Osprey to gradually reduce as a result of the board-approved business plan of the company to reduce leverage at OpCo to 80% by 2020, and the expectation that management will not increase Holdco's current level of debt of GBP450m.

As a result, we forecast Osprey's pension-adjusted net debt/regulatory asset value (RAV) to reduce to around 86% by March 2020 from around 89% in the financial year to March 2015. We view the current forecast level of dividend cover as a mitigating factor for leverage being slightly above the rating guidance of 85%.

For FY15 (the last year of AMP5) Fitch calculates Osprey's dividend cover of around 3x, pension-adjusted net debt/RAV at 89.3%, and post-maintenance and post-tax interest cover (PMICR) at around 1.1x.

Low Inflation a Risk
Incremental debt at holding level of GBP450m represents around 6% of RAV and incurs an average annual financial charge of around GBP35m. Reduced dividend stream from Anglian Water will still allow comfortable servicing of the debt. However, if retail price inflation remains materially below 1.5% for an extended period of time, dividend stream from Anglian Water would be further reduced. This could lead to negative rating action for Osprey's ratings if shareholders do not bear the risk of lower inflation.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for OpCo include:
- Regulated revenues in line with the final determination of tariffs for April 2015 to March 2020, ie assuming no material over- or under-recoveries.
- Combined totex outperformance and Outcome Delivery Incentive leakage outperformance of GBP168m in nominal terms over the five-year period.
- Slight underperformance in retail costs.
- Non-appointed EBITDA of around GBP7.7m per annum.
- Retail price inflation of 1.3% for FY16, 2% for FY17 and 2.5% thereafter.

In addition, for Osprey we assume:
- Incremental debt at holding company level to remain at GBP450m.
- Average annual finance charge at holding company level at around GBP35m.

RATING SENSITIVITIES
Negative: Future developments that could lead to negative rating action include:
- A sustainable drop of expected dividend cover below 3x, for example due to RPI remaining materially below 1.5% over an extended period of time.
- Forecast group gearing sustainably above 85%, coupled with forecast dividend cover dropping to close to 3x.
- A marked deterioration in operating and regulatory performance of Anglian Water or a material change in business risk of the UK water sector.

Positive: The ratings currently do not have any upside. A higher rating for the holding company would be contingent on Anglian Water materially reducing its regulatory gearing.

LIQUIDITY
As of 30 September 2015, Osprey held GBP21m in cash, and AWOF had available GBP125m of undrawn, committed bank facilities with maturity in 2020. This is sufficient to bridge short-term liquidity needs. For debt service, Osprey and AWOF effectively rely on upstream cash flows from their operating subsidiaries, primarily Anglian Water.