OREANDA-NEWS. March 23, 2015. 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+'.

Osprey is a holding company of Anglian Water Services Limited (Anglian Water or OpCo; A/BBB+/Negative), one of 10 appointed regulated water and sewerage companies (WaSC) in England and Wales.

The affirmation reflects the adequate dividend capacity of the OpCo in comparison with the debt service requirements of Osprey and expected reduction of subordination for investors at Osprey. This is in spite of the pressures Anglian Water faces on its credit metrics due to Ofwat's (the regulator for the UK water sector) final determination of tariffs for the price review covering April 2015 to March 2020 (AMP6) and a slowdown in retail price inflation.

The rating also reflects the market-leading operational and regulatory performance of Anglian Water (see "Fitch Affirms Anglian Water's Senior Secured Debt at 'A'/'BBB+; Negative Outlook'", published on 20 March 2015, 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.

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 and reduced subordination at Holdco
Fitch forecasts comfortable dividend cover at 4.7x and post-maintenance and post-tax interest cover (PMICR) at around 1.1x for AMP6. We also forecast Osprey's pension-adjusted net debt/regulatory asset value (RAV) will fall to around 86% by March 2020 from around 90% in the financial year to March 2015. We also expect subordination at Osprey to gradually reduce as a result of the OpCo's expected deleveraging over AMP6. For FY14 Fitch calculates Osprey's pension-adjusted net debt/RAV at 89.9%, dividend cover at 4.5x and post-maintenance and post-tax interest cover (PMICR) at around 1.3x. We view the strong dividend cover as a mitigating factor for leverage being above the rating guidance.

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 GBP36m. Reduced dividend stream from Anglian Water expected for the next price control 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 GBP148m 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 0.75% for FY15, 1% 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 GBP36m

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 AND DEBT STRUCTURE

As of 30 September 2014, Osprey held GBP21.3m in cash, and AWOF had available GBP25m of undrawn, committed bank facilities with maturity in November 2015. 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.