Moody’s outlines COVID-19 ESG risk as credit agencies assess HAs’ strain

News09 Jun 2020Sarah Williams

Moody’s has defined COVID-19 as a ‘social risk’ under its environmental, social and governance (ESG) framework, as it affirmed its rating on one provider.

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The decision to uphold the A2 rating of Flagship is the latest in a flurry of recent affirmations by credit agencies, despite the ongoing impact of the virus on the wider economy.

Outlining its assessment of Flagship in relation to ESG factors, Moody’s said that it views the coronavirus outbreak as a “social risk”.

It explained: “We view the coronavirus outbreak as a social risk under our ESG framework. We expect the pandemic to have material impacts on housing associations, however for the majority of HAs, including Flagship, we expect that they will be able to mitigate these impacts so that credit profiles are not significantly affected.

“We expect the main impacts will be through operational challenges, including staffing shortfalls and redeployment, and increases in rental arrears in the short term due to higher unemployment.

“However, we also expect that HAs, including Flagship, will be able to make cash savings on repairs and maintenance as these are now limited to essential works, in addition to pausing or cancelling development plans, which will support liquidity.

It comes after a update from the agency on 6 April said it expected the crisis to lead to an unemployment rate of 6.5 per cent by the end of 2020, with HAs facing rent arrears as newly unemployed tenants transition to receiving benefits.

However, of rated HAs, it said that a median of 38 per cent of social housing letting income was paid through the benefits systems in fiscal year 2019, and was “therefore currently not at risk”.

Analysis by the agency suggested a 75 per cent reduction in repairs and maintenance costs for rated HAs in the 2021 financial year would absorb £1.1bn in arrears and bad debts, or 14 per cent of expected social housing letting income.

Ratings affirmed

The credit ratings of a number of other social housing providers have been affirmed despite the COVID-19 pandemic’s ongoing impact on the wider economy.

However Standard & Poor’s (S&P) downgraded North East-based Karbon Homes’ rating at the end of May, citing the impact of anticipated further deterioration to “already limited economic dynamism” in the region as a result of the crisis.

More widely, ratings agencies have highlighted housing associations’ resilience linked to factors such as strong liquidity, having a large proportion of tenants already in receipt of benefits, and mitigations to control spend.

Downgrading its rating for 27,000-home provider Karbon Homes from A+ to A (stable) on 27 May, S&P said that economic conditions in the North East, which it expects to “deteriorate further” as a result of the outbreak, would continue to limit Karbon’s ability to boost its financial performance.

However it referred positively to the provider’s consistent focus on low-income social housing, which “makes its streams more predictable and ensures low industry risk”. It said the provider is likely to scale down further its exposure to market sales, with revenues from first tranche and outright sales expected to average around four per cent in financial years 2021 to 2023, down from 10 per cent previously.

The ratings agency also affirmed the A+ credit ratings of Scottish housing provider Wheatley Group and East of England-based Cross Keys Homes.

While the agency said it anticipates some rental income loss during the current financial year as a result of COVID-19, the outlook for both ratings is stable.

S&P said it expects 63,750-home Wheatley Group to “successfully navigate the uncertain environment created by the spread of the COVID-19 pandemic”. It said that the group had strengthened its liquidity last year, while its size “puts it in a good position to withstand unexpected shocks”.

S&P assumed a base case of rental income loss of around eight per cent for the year ending 31 March 2021, as Wheatley’s arrears spike and some bad debts materialise. But the agency anticipates that financial performance will “remain resilient during the COVID-19-induced recession largely because most of its tenants receive housing benefit or Universal Credit”.

The report noted that the group has paused its development aspirations as a result of the government-imposed lockdown. It also cited the positive impact on Wheatley’s debt profile from the constitutional partnership with Dumfries & Galloway Housing Partnership completed last year.

For 11,533-home provider Cross Keys Homes, a short-term increase in arrears during the COVID-19 pandemic, combined with a higher cost base and additional investment in existing properties, is expected to “strain profitability”. This means adjusted EBITDA margins will be lower than previously expected over the three years to March 2023.

However, S&P still expects average EBITDA margins to remain above 30 per cent of revenue during the period, with a dip to 30 per cent in 2021, from the 35 per cent estimated for 2020.

The updates came a week after Fitch affirmed the long-term issuer default credit rating of Origin Housing at A, while revising the outlook from stable to negative.

In a combined update on 14 May, the agency also affirmed the A+ rating of Great Places Housing Group, maintaining the negative outlook it had placed on the group’s rating in April as a result of its downgrade to the UK sovereign.

Fitch said that both Great Places and Origin had “maintained a strong performance, which [Fitch expects] will improve, aided by [both HAs’] continued but conservative development plans”.

It said that for both entities, around 80 per cent of total turnover continued to come from social housing lettings, while debt would continue to rise to fund development programmes.

Fitch had revised the outlook on Great Places’ A+ rating to negative on 1 April, along with that of Hyde, L&Q and A2Dominion, after downgrading the UK sovereign.

However the stable outlook on the A rating of three other housing associations rated by Fitch – including Origin – had remained unchanged at that time.

The 14 May report emphasised that although registered providers enjoy a single-notch uplift to their standalone ratings under the agency’s government-related entity criteria, the ratings do not automatically move in line with those of the sovereign.

It said that Origin’s outlook was revised down as a result of the expected increase in the South East group’s debt-to-EBITDA ratios in the next five years, as it ramps up its development target for the period.

“Net adjusted debt/EBITDA was 14x at FYE19 but Fitch expects this to rise significantly in its rating case over the next five years,” it said.

Earlier, on 28 April, S&P affirmed the A+ long-term issuer rating of 12,500-home provider Lincolnshire Housing Partnership (LHP). The stable outlook reflected S&P’s view that adherence to LHP’s financial policies would allow the provider to “manage the current headwinds”.

Elsewhere, S&P placed Essex-based Colne Housing on its CreditWatch list in view of the “positive implications” of its upcoming merger with Greenfields Community Housing.