Analysts at Credit Suisse downgraded their view on the UK water sector, telling clients there was a fair chance that OFWAT would be less generous in its next regulatory price review, PR 19.

The review would mark a turning point for the sector after the windfall returns over the past 10 years which saw this group of stocks trade at premiums of between 20% to 25% versus the value of their asset base on an enterprise value basis.

Those racy valuations had also driven mergers and acquisitions activity at high multiples, the broker pointed out.

Then, of course, there was the no small matter of rising political risk in Britain.

Key to all of the above, the Swiss broker estimated OFWAT would set a baseline weighted-average-cost-of-capital below 3% for the period running from 2020 to 2025.

The last time OFWAT lowered its WACC, from 5.1% to 3.7% real, that was offset by a roughly 175 basis points drop in bond yields. OFWAT also proved significantly flexible when it came to allowing companies to use their financeability levers.

But Credit Suisse advised against expecting a repeat.

“We would not see it as prudent to depend upon a repeat of this dynamic,” its analysts said.

Indeed, should government bond yields rise in tandem, that would mean their cost of capital would be 'marked-to-market' as a result – for the first time in three years.

OFWAT could also be less flexible this time around regarding the financeability levers.

Credit Suisse downgraded its recommendation on United Utilities from 'outperform' to 'neutral', while staying at 'underperform' on Pennon and at 'neutral' on Severn Trent.

Its target prices were lowered from 1,000p to 850p, from 750p to 710p for the former two companies but that for the latter it was increased from 2,190p to 2,230p.