Moody’s raises outlook on ratings for 33 housing associations

The ratings agency said the inflationary pressures, compounded by high expenditure requirements on existing stock and social rent caps, have weighed on operating performance.

 

However, with inflation projected to ease, HAs are expected to see revenue growth exceed cost growth, supporting their operating margins and interest coverage ratios over the medium term, Moody’s added.

 

The credit ratings agency said the change in outlooks also reflects the actions that landlords have adopted to mitigate the adverse effects of the “challenging” operating environment.

 

“Many have scaled back their development programmes, thereby limiting their exposure to escalating construction costs and moderating the pace of debt growth, as much of their capital spending is financed through debt,” Moody’s said in its report.

 

“This containment of debt growth also aids in reducing their susceptibility to rising interest rates. Additionally, housing associations have reduced their exposure to market sales in favour of developing social housing properties for rent and investing in existing stock, aided in part by increased grant funding. This lowers their vulnerability to the current housing market downturn.”

 

Moody’s said that HAs have built up “robust liquidity” over recent years at much lower rates.

 

It said that this, coupled with prudent treasury management, has so far provided a degree of insulation against the impact of escalating interest rates. Around 80 per cent of the sector’s debt is at fixed rates and short-term refinancing needs are minimal.

 

Moody’s added that liquidity within the sector remains high, with cash and undrawn facilities projected to cover on average over two years of net cash requirements across the rated portfolio.

 

“The affirmations reflect underlying sector strengths, including high demand for social housing that supports revenue growth, a track record of proactive cost control and effective oversight by the regulator,” the agency said.

 

Negative outlook maintained for six HAs

 

Moody’s has affirmed the ratings and maintained the negative outlooks for six HAs.

 

These include: L&Q Group and L&Q Housing Trust, Stonewater and its subsidiary Stonewater Funding, Hightown, GSA, Jigsaw Homes Group and its subsidiary Jigsaw Funding as well as Moat Homes and its subsidiary Moat Homes Finance.

 

Moody’s said the negative outlooks reflect these providers’ “decreased resilience and high exposure to a challenging operating environment” due to one or more of several characteristics.

 

These consist of: a significantly weakened operating performance, high capital expenditure, a high reliance on market sales revenue and higher treasury risks than peers.

 

“The affirmations reflect underlying sector strengths, including high demand for social housing that supports revenue growth, strong asset bases, a track record of proactive cost control, effective oversight by the regulator and generally high liquidity,” Moody’s said.

 

(To read comments from the HAs, see box below.)

 

Riverside Group

 

Meanwhile, Moody’s has downgraded the rating for Riverside Group and the senior secured debt rating for Riverside Finance, from A3 to Baa1, while the outlook for both has been raised from negative to stable.

 

The credit ratings agency said the downgrade reflects Riverside’s weaker operating performance relative to peers, with a poorly performing care business and higher fire building and safety expenditures inherited from its merger with One Housing in December 2021.

Moody’s said: “These issues are exacerbated by inflationary pressures and increased demand for repair and maintenance, challenges that are currently being experienced across the sector.

 

“Furthermore, the downgrade reflects higher treasury risks than other rated housing associations, with increased refinancing risk, greater exposure to variable rates and relatively lower liquidity.

 

“However, Riverside’s liquidity position is in line with the regulator’s requirements. The stable outlook reflects adequate debt metrics, Riverside’s strong market position and the proactive steps taken to reduce risk, including generating savings from the merger, scaling back development and reducing the exposure to market sales.”

 

A spokesperson for Riverside said the financial outlook in the short term is “challenging”, with building safety costs in the millions, social rents capped and higher inflationary costs.

 

But the provider said in the long-term it is “financially stronger together” following the merger.

 

For example, it has committed to invest £1bn in improving and repairing its homes over the next five years and has set up a £2.5m per annum fund to help support its customers through the cost of living crisis.

 

“We are only in a position to make these commitments because of the two organisations agreeing to come together to shield our customers and services as much as possible under the bolstered strength of the group,” a spokesperson from Riverside said.

 

“Our executive team and group board are working together on a plan to ensure that we are mitigating against financial risk including scaling back on new development, reducing exposure to market sales and expediting integration savings.

 

“Our treasury strategy also includes additional plans to restructure the combined debt portfolio and we expect that by delivering these changes, we will improve our credit rating.”

 

Walsall Housing Group

 

Moody’s has upgraded WHG’s rating from A3 to A2 and WHG Treasury’s senior secured debt rating from A3 to A2. The outlook for both entities has been maintained at stable.

 

Moody’s said: “The upgrade reflects Walsall’s strong deleveraging trend and Moody’s expectation that it will maintain a stronger balance sheet and more robust interest coverage ratios than peers.”

 

Despite economic challenges, Moody’s said it anticipates that the HA’s gearing will remain in line with A2-rated peers.

 

This is because of the landlord’s strong financial management, moderate exposure to market sales and moderate development ambitions compared to peers.

 

Moody’s added: “The stable outlook reflects Moody’s expectation that the expected gradual reduction in inflation will alleviate pressures on the cost base and that the proactive risk reduction measures taken by Walsall in a weaker operating environment will limit development risk.”

 

WHG has ben contacted for comment.

 

Blend Funding

 

Elsewhere, Moody’s raised the outlook from negative to stable and affirmed the rating at A2 for social housing debt aggregator Blend Funding.

 

Moody’s said the raise in outlook reflects its view that the credit quality of the underling providers in its pool will improve. It said the affirmation reflects strengths of the sector, the presence of a liquidity reserve and strong management of the pool by THFC.

 

Arun Poobalasingam, funding and marketing director at THFC, said: “These strong ratings and the associated messaging from both agencies confirm that that our management policies and the level of due diligence and monitoring we apply to our loans supports the strong credit quality of both the THFC and Blend loan portfolios, which will in turn allow us to support more borrowers in the sector with new funding requests.”