S&P director expects fewer credit rating downgrades for housing providers

He said: “It’s not critical, but it’s noticeable as well. And of course, it’s the result of the combination of slower revenue growth, caps on rent increase and deviation from the [Consumer Price Index] plus one [per cent] regime on the one side and, on the other side, demand to increase maintenance costs for investments in existing stock. So it squeezed performance and resulted in weaker financial indicators across the board.

“Going forward, though, we expect probably less negative rating actions. We will look at the difference between positive and negative outlooks on our ratings, and it’s below what it was for a decade at the moment, so we expect less negative rating actions than we saw before.

“One interesting observation, though, is that most of the next outlooks are concentrated at the A- level. So that’s an interesting zone to keep an eye on, because some [entities rated at] A- may end up in the BBB category.”

George Flynn, a director at Savills Financial Consultants, said the sector was still viewed as A-rated, albeit towards the lower end.

He said there was precedent with regard to BBB organisations accessing both the capital markets and the banking market, but that there was an adjustment around pricing dynamics, as well as funders’ appetite levels.

Mr Flynn said there was around 25 basis points (bps) difference between an A- and BBB+ organisation, but between A+ and BBB+ there was a “more significant” difference of around 40bps.

However, Mr Flynn said the “core cornerstones of our advice” around funding strategies remained consistent.

“It’s all around ensuring robust liquidity, managing key treasury risks that are there, [and] understanding the impact, but also opportunity,” he said.

“There are some funders out there that actually quite like the fact that they can get paper at wider spreads and then can see a credit improvement.

“We’ve seen a similar impact on governance, where you might buy [paper from] a housing association at a G2 or a G3 to see the governance improvement plan and achieve a wider spread on that side. Certainly, I think it probably adjusts the pool of investors and banks that you want to go to, but it doesn’t fundamentally change the advice in terms of funding strategies.”

Chris Mathews, senior credit research analyst at the Pension Insurance Corporation, said credit ratings played a “really important” role for the funder to pick its investments because, as a regulated insurer, it has to post capital to its investments.

“So, the stronger the credit rating, the less capital that we require, the lower the credit rating, the more capital that we need to put aside for that, and that directly impacts pricing as well,” he said.

When asked if there was a particular distinction between the A and BBB category, Mr Mathews said he did not believe there was one particular difference.

He said: “Every [housing association] has idiosyncratic risks. I don’t think the BBB+ is a bad rating. I think maybe that’s a perception that, because the sector has been rated A-category or higher for so long that a BBB+ is maybe a black mark against them, but it’s an extremely strong investment-grade credit rating, and it’s not a case of once you’re BBB+, there’s only one direction, right? We see upgrades as well.

“And I think a lot of the pressure that we’re seeing in the sector is due to a kind of temporary [impact of], for example, getting assets to [an Energy Performance Certificate rating of Band] C or above with the deadline by 2030, and when we see business plans actually beyond 2030, metrics look a lot better. Whether that will materialise with net zero, it remains to be seen.”

In November, S&P warned that nearly 70 per cent of its rated social housing providers could “migrate towards” the lower end of the A category if investments in homes were to increase “modestly” above expectations.