The future of Southern Water has been thrown into fresh doubt after ratings agency Moody’s downgraded the company to junk status.

The move is likely to make it harder for Southern, which provides water to nearly 5m people in the South East of England, to raise billions of pounds in vital funding required to pay for the upkeep of its pipes and drains, and meet strict environmental standards over the coming years.

It also increases the likelihood of it breaching the terms of its licence, and leaves the debt-laden water supplier teetering on the brink of defaulting on its borrowings, Moody’s said.

It comes less than a fortnight after the company was forced to turn to a pack of vulture funds for hundreds of millions of pounds in financing after being given the cold shoulder by mainstream capital markets.

The new debt comes with an average interest rate approaching 10pc – nearly three times higher than the water services regulation authority Ofwat’s assumed cost of borrowing for the water industry.

‘History of financial underperformance’

Though Southern’s predicament is yet to match that of Thames Water, it is among the most financially-stretched water suppliers in the sector – with a £6bn debt pile that has become more expensive to service as a result of the jump in interest rates.

The company’s “history of material operational and financial underperformance” could continue over the next five years and impact Southern’s plans to raise £4bn in new debt and at least £650m of new equity, Moody’s warned. The downgrade came as part of a broader review of the UK’s privatised water sector.

“In the face of continuing public scrutiny and heightened political and regulatory focus, there has been a material and sustained weakening of credit quality for nearly all companies,” the rating agency said.

Southern insisted the downgrade “will have no impact on the services we provide to our customers.”

“As Moody’s acknowledges, we maintain a strong liquidity position. Earlier this month we secured additional financing whilst we await Ofwat’s Final Determination on our ambitious 2025-2030 business plan.”

The water company also pointed out that it has raised over £1.5bn of new debt financing over the past 12 months, along with £1.6bn of fresh equity from shareholders since 2021. “This financing has allowed us to implement our turnaround plan, to deliver for our communities and the environment,” it added.

Stuart Ledger, Southern Water’s finance director, said: “The action by Moody’s Ratings today reflects the growing challenges and uncertainty faced by all companies operating in the UK water and wastewater sector.”

Southern is owned by Australian investment giant Macquarie. They have been blamed for the current state of Thames, as it loaded the company up with debt and extracted billions of pounds in dividends when it was a large shareholder in business between 2006 and 2017.