No-deal Brexit could trigger downgrade for 20 HA ratings, says S&P
A ‘no-deal’ Brexit could lead S&P Global Ratings to lower its ratings on 20 housing associations and nearly half of the 47 UK social housing providers, universities and local governments that it rates publicly.
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S&P reiterated this week that its base case is for the UK not to exit the European Union without a deal.
But it said the risk of an eventual no-deal Brexit remains high and is a material credit risk for its UK public sector entities, given the projected economic contraction, with a substantial drop in house prices and downward pressure on the sovereign rating.
However, it added that the ultimate impact would depend on the response of HA leadership teams, highlighting that associations “have mitigation strategies in place that they can swiftly implement”.
The warning came ahead of prime minister Boris Johnson’s latest Brexit deal – reportedly agreed by the EU – going to a vote in the House of Commons tomorrow (19 October 2019).
S&P said its analysis of a no-deal Brexit shows that it could downgrade half of the 41 publicly rated UK housing associations (HAs) in its portfolio by one notch.
It said it would likely lower the ratings of 11 HAs because of the impacts on the housing market and therefore changes to their “intrinsic credit characteristics”, including a deterioration of their debt profile.
It said: “We see as particularly vulnerable the ratings on providers who increasingly depend on proceeds from market sales, or receive uplift for extraordinary support from their related government.”
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S&P potential HA ratings change
The ratings agency said that Brexit uncertainty has already started to trickle down into lower housing prices and sales volumes, especially in London.
“Over the past 12 months, we have lowered the ratings on six HAs and revised the outlook to negative on five others.
“In most of these cases, due to expected lower proceeds from development-for-sale, we revised down our medium-term forecasts of HAs’ financial performance and interest coverage.”
S&P said it has also seen significant shifts in the business plans of HAs that are heavily exposed to outright sales.
“They have adapted their strategies following the market slowdown and in anticipation of a further contraction.
“In a no-deal scenario we foresee further pressure on our ratings of HAs mostly because of economic contraction, especially in the real estate sector.”
Along with the deterioration of the debt profile, S&P said it expects lower earnings to result in increasing funding needs with debt metrics – such as interest cover – coming under pressure (see chart below).
S&P added: “The ultimate impact of a no-deal Brexit depends on management responses to these challenges.
“While our base case does not take into account proactive measures, we acknowledge that many HAs have mitigation strategies in place that they can swiftly implement.
“In most cases, they can delay maintenance and capital spending, and from 2020 would be able to raise rent fees.”
It added that the credit quality of social housing financial agencies such as The Housing Finance Corporation, MORhomes and GB Social Housing will “remain intact due to their solid financial profiles”.
S&P potential fall in HA interest cover
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