Moody’s downgrades credit ratings of six housing associations

Newlon Housing Trust’s rating was lowered from A3 to BAA1, which Moody’s said reflected the anticipated worsening of its debt and interest cover metrics.

The agency also downgraded the issuer and debt ratings of Poplar Harca and its SPV from BAA1 to BAA2 to reflect the fact that it has weaker metrics than its peers.

It said this included “their weak operating margins and interest covers”, as well as higher exposure to market sales, which make it more vulnerable to weaker economic conditions.

Baseline Credit Assessment downgrades

In total, Moody’s lowered the BCAs of 13 providers, by one notch for 12 associations and by two for Riverside.

The rating agency defines a BCA as an opinion of an issuer’s standalone strength and the likelihood of it requiring extraordinary support to avoid a default on one or more of its debt obligations.

Of the associations whose credit ratings were also downgraded, Alliance had its BCA downgraded from A3 to A2, Citizen and Sovereign from A3 to BAA1, Newlon from BAA2 to BAA3, Poplar Harca from BAA3 to BA1 and Riverside Group by two notches, from A3 to BAA2.

Elsewhere, the BCAs of Great Places Housing Group, The Guinness Partnership, L&Q Group, PA Housing, Saffron Housing Trust, Saxon Weald and Yorkshire Housing were all downgraded from BAA1 to BAA2, while their credit ratings were unchanged. These associations’ ratings and those of their SPVs were confirmed at A3.

Moody’s said the downgrades of the 13 BCAs reflected the housing associations’ “high exposure and lower resilience to weakening economic conditions”. These include prolonged high inflation, capped social rent increases, a housing market downturn and higher interest rates, the agency added.

Moody’s said in its report: “This is predominantly due to these HAs having one or more of the following characteristics making them more vulnerable to these factors: weak operating performance going into the current weaker economic environment; a high level of necessary expenditure which limits spending flexibility; a high reliance on revenues from market sales; substantial development programmes; or a high proportion of variable rate debt or financing (including refinancing) needs.”

Moody’s said some of the HAs have lower operating margins than rated peer medians, making them less resilient to the weaker operating environment, so they have less headroom to “manage further deterioration in margins” from the social rent cap.

It said: “In fiscal [year] 2022, L&Q, Poplar Harca, Riverside and Yorkshire had operating margins below 20% and Alliance, Citizen, Guinness and PA Housing below 25%.”

The downgrades also reflect the exposure to high-cost inflation for the HAs with less flexible cost bases, the agency added.

It said this was primarily because of high levels of expenditure related to fire safety, building quality and decarbonisation, which limits their ability to contain higher costs, driving lower surpluses and higher debt.

The downgrades also incorporate Moody’s view regarding which associations have greater exposure to a housing market downturn. The agency expects UK house prices to contract by five per cent in 2023 and 2024.

Moody’s said HAs with higher exposure to market sales, including first-tranche shared ownership and outright sales, were unlikely to achieve forecast income. This would lead to lower surpluses and tighter interest cover covenants, as well as reduced funds to finance development, it said.

"Poplar Harca and L&Q are the most exposed HAs in Moody’s portfolio, expecting over 30% of turnover from market sales (including joint  ventures) over the next three years; a very high exposure. Similarly, Guinness, Great Places, PA Housing, Saffron, Sovereign and Yorkshire are more exposed than the rated peer median, expecting to generate over 20% of their turnover from market sales,” the report said.

The downgrades also reflect continued high levels of development risk for some HAs, which Moody’s said generally drives higher debt. Interest coverage ratios will weaken for these HAs, given higher interest rates, the credit rating agency added.

Moody’s said the downgrades highlighted higher treasury risks faced by some HAs, including high levels of variable rate debt and high medium-term refinancing needs, which will result in higher financing costs, weakening interest coverage ratios and covenant headroom.

The credit rating agency said that headroom on covenants, especially interest cover covenants, have also weakened for many.

Sector strengths

However, Moody’s said the ratings also reflect underlying sector strengths. These include high demand for social housing, strong asset bases, a track record of proactive cost control, effective oversight by the regulator, and generally high liquidity and a high proportion of long-dated fixed rate debt, as well as a strong likelihood of extraordinary support from the UK government.