OREANDA-NEWS. Fitch Ratings has affirmed Greensands UK Ltd's (Greensands) Long-Term Issuer Default Rating (IDR) at 'B+' and senior secured rating at 'BB-'. The Outlook on the IDR is Stable.

At the same time, the bonds issued by Southern Water (Greensands) Financing plc (SWF), which are unconditionally and irrevocably guaranteed by Greensands as well as its parent, Greensands Holdings Limited, and its two subsidiaries, Greensands Junior Finance Limited and Greensands Senior Finance Limited, have been affirmed at 'BB-'/'RR3'.

Greensands is a holding company of Southern Water Services Limited (Southern Water or OpCo), one of 10 appointed regulated water and sewerage companies (WaSC) in England and Wales.

The affirmation and Stable Outlook reflect the adequate dividend capacity of Southern Water in comparison with the debt service requirements of Greensands, and its adequate credit metrics.

The ratings also take into account Southern Water's position in the lower half of the similarly rated peer group in terms of regulatory and operational performance (see "Fitch Affirms Southern Water's Senior Secured Debt at 'A-'/'BBB'; Outlook Stable", published on 19 July 2016, at www. fitchratings. com), as the main operating subsidiary of the group, as well as the structurally and contractually subordinated nature of the holding company financing at Greensands level.

KEY RATING DRIVERS

Adequate Dividend Cover

For the price review covering April 2015 to March 2020 (AMP6), Fitch forecasts average dividend cover of around 3x and average post-maintenance and post-tax interest cover (PMICR) at around 1.3x. We also forecast Greensand's pension-adjusted net debt/regulatory asset value (RAV) at around 89%-90% over AMP6. For the year ended 31 March 2016 (FY16) Fitch estimates Greensand's pension-adjusted net debt/RAV at 90%, dividend cover at around 2.0x and PMICR at 1.1x.

Improved dividend cover is mainly a result of around GBP215m of revenue under-recoveries at Southern Water for AMP5, which have been returned to the company through a revenue correction mechanism. We calculate a normalised average dividend cover of around 2.0x for AMP6, when the effect of the under-recoveries is excluded.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for Southern Water:

- Regulated revenues in line with the final determination of tariffs for AMP6, i. e. assuming no material over - or under - recoveries

- Combined totex outperformance of around GBP86m in nominal terms over AMP6

- Underperformance in retail costs

- Unregulated EBITDA of around GBP4m per annum

- Retail price inflation of 2% for FY17 and 2.5% thereafter

- No impact on cash flow generation from outcome delivery incentives, given that financial rewards and penalties will all be taken into account as part of the next price review

- Proceeds from the sale of the non-household retail business and a reduction in EBITDA of around GBP4m p. a. from FY18

In addition, for Greensands we assume:

- Incremental debt at holding company level based on pension adjusted net/debt to RAV of 90% or below for the whole group

- Average annual finance charge at holding company level of around GBP33m

RATING SENSITIVITIES

Positive: Future developments that could lead to a positive rating action include:

- Sustained improvement of cash flow generation at Southern Water as a result of improved regulatory and operational performance that would place the company on an average position among peers.

Negative: Future developments that could lead to a negative rating action include:

- A sustained drop of expected dividend cover below 2.0x, for example due to RPI remaining materially below 1.5% over an extended period of time

- Southern Water's covenanted and secured financing going into lock-up

- A marked deterioration in operating and regulatory performance of Southern Water or a material change in business risk of the UK water sector.

LIQUIDITY

Greensands relies on dividends for debt service. As of 31 March 2016 the company held unrestricted cash and cash equivalents of GBP20.2m and GBP40m of committed, undrawn revolving credit facilities with a 2019 maturity with the option to extend for two years. Compared with the company's annual finance charge of around GBP33m, Fitch deems available liquidity as adequate. The next bond maturity is in 2019 for GBP250m.