Moody's downgrades 40 associations and five councils after UK rating cut

A total of five councils, the UK government-guaranteed funding vehicle PRS Finance plc and Transport for London were also included in the reconfiguration as part of a review of sub-sovereign sectors affecting 55 entities altogether.

The United Kingdom’s credit rating was downgraded by Moody’s on Friday evening (23 September 2017) in relation to its exit from the European Union and continued pressure on public finances, particularly in relation to the welfare bill.

In an update last night (26 September 2017), Moody’s cited ‘the close institutional, operational and financial linkages between HAs and the UK sovereign’, and gave the sector a stable outlook to reflect that of the sovereign rating.

In addition, Warrington Borough Council and Lancashire County Council – both of which have invested in social housing providers – saw a two-notch downgrade.

Providing an overview of the HA sector, Moody’s said it expects the median operating margin across associations to remain stable and near 30 per cent over the next two years, and median social housing letting interest cover to remain around 1.4x.

It said: “HAs have adapted well to a challenging policy environment, which is unlikely to undergo further material change in the medium-term. Additionally, oversight in the sector remains strong, with the regulator (the Homes and Communities Agency) effectively monitoring risk through quarterly reporting and in-depth assessments. In addition, it has the ability to intervene in the management of a HA in financial distress.

The sector generally receives a one-notch uplift in relation to the likelihood of ‘extraordinary’ support from government in the case of financial stress.

The Social Housing Annual Conference heard last year that a two-notch movement can shift pricing by around 40 basis points on average. The pricing is linked to the perceived risk and higher level of capital investors have to place against lower-rated investments.

The baseline credit assessments (BCAs) – or underlying ratings – of the 40 HAs have been maintained with the exception of Notting Hill Housing Group, which the agency says has breached the association’s treasury policy by having 15 months of liquidity available rather than 18 months’ worth. However it expected the breach to be resolved in the coming months and once funding is obtained its liquidity coverage ratio would recover to 1.3x in line with a rated peer median of 1.4x.

The breach was due to funding not materialising as planned and funding being deferred because of merger talks with Genesis, the report said.

Notting Hill is now set to launch a benchmark bond

Providing an overview of the sector, Moody’s added: “Declining government transfers and capital funding have led to increases in market sales exposure in the sector, however the level of exposure varied from 0% - 42% in FY2016 across our rated HAs and is incorporated in their given idiosyncratic BCA rating.”

Adrian Bell, director and head of social housing at JCRA, said there is "clearly a risk that the downgrade will have pricing implications".

He pointed out that it leaves Moody’s ratings at least two notches below S&P ratings, and that two associations now have Baa2 ratings from Moody’s – which is just two notches away from sub-investment grade.

Those organisations are Genesis and Poplar Harca.