Moody's affirms Orbit’s rating ahead of planned bond issue

Moody’s confirmed the A2 rating for Orbit Group but changed its outlook to negative from stable, to reflect the “credit risk of its plan to increase capital expenditure”.

Orbit’s market sales revenues are forecast to increase to 42 per cent of total turnover by 2020, from 33 per cent last year, making Orbit one of the most exposed to commercial activities among rated housing associations.

Moody’s baseline credit assessment is a3 but this is upgraded because the agency’s view that associations receive extraordinary support from UK government, in line with Moodys policy on social housing assets.

The ratings agency also assigned a debt rating of (P)A2 to Orbit Capital’s proposed issuance of between £250m and £450m in long-term senior secured bonds.

Following the bond issuance, Orbit plans to use the proceeds to refinance existing loan facilities to simplify its debt structure and support its strategy.

The upper limit of the bond issuance would increase Orbit’s current debt position by approximately 10 per cent, which would have a limited impact on its debt ratios; with debt to revenue and gearing increasing to 3.8x and 52 per cent from 3.3x and 51 per cent, respectively.

The forecast increase in capital expenditure weakens the housing association’s liquidity cover metric for this financial year from a projected 2.36x to 0.82x, pre-bond issuance, according to Moody’s.

The A2 issuer rating on Orbit reflects the entity’s strong cash flow volatility interest cover at 2.2x and healthy social housing letting interest cover (SHLIC) at 1.6x in FY2017, which is in line with A2 peers, it said.

Moody’s said the rating is further supported by Orbit’s strong market position in the Midlands, and its healthy unencumbered asset position which enhances its borrowing capacity.

The change in outlook to negative from stable reflects the credit risk stemming from Orbit’s plans to materially increase capital expenditure, as well as the increased proportion of market sales in the group’s development plans, according to Moody’s.

The forecast increase in capital expenditure weakens the housing association’s liquidity cover for this financial year from a projected 2.36x to 0.82x, pre-bond issuance, said Moody’s. Weaker liquidity cover would make Orbit more susceptible to negative changes in the market.

This would be exacerbated by Orbit’s planned high capital expenditure over the next three-to-four years.

As margins from sales are generally lower than Orbit’s social housing letting margin, total operating margin is set to remain low relative to peers, at 26 per cent, to 2020, said the ratings agency.