S&P warns nearly 70% of rated providers could ‘migrate’ towards lower end of A category

The credit rating agency added: “According to our sensitivity analysis, if investments in existing and new homes were to increase modestly above expectations, interest coverage for nearly 70 per cent of our UK rated social housing providers could drop to a level that is no longer commensurate with the current ratings. In this case, many of the ratings could migrate toward the lower end of the ‘A’ category.

“However, whether pressure from rising investments would translate into rating actions outside our sensitivity analysis would primarily depend on management’s response to the financial pressure.”

Sector remains A rated despite weakening creditworthiness

S&P said that the average rating on its 41 rated social housing providers remains A.

The agency said “the key reason” the sector remains A-rated despite the downward migration in SACPs is because it accounts for government-related support.

It believes that social housing providers would receive timely extraordinary support from the government in the event of financial distress.

Mitigating factors

There are mitigating factors that could support providers’ ratings overall, with the actual performance of each housing provider depending on its management priorities and risk appetite, S&P said.

“Some social housing providers still have rating headroom and are carrying out mitigating strategies to ease financial pressure.

“Also, additional grant availability from the government could balance these investment needs.”

‘Positive’ rent settlement proposals 

Elsewhere, in S&P’s report on the impact of the October Budget on UK public sector entities, the credit rating agency said it views the government’s commitment to medium-term certainty on the rent settlement and additional grants as “positive” for social housing.  

In the Budget, the government launched a consultation on a five-year rent settlement for the sector, in which rents would be permitted to rise each year by the Consumer Price Index plus one per cent.

S&P said this proposal was “consistent” with its base-case assumptions.

“The details of the rent settlement are still under consultation, but we do not think social housing providers will receive compensation for deviations from the settlement in previous years,” S&P said in its report.

“Additional grants for investments in existing homes should be positive for the sector, but details about scope, availability, and disbursement are currently lacking.”

On the Budget’s announcement of a £500m top-up to the existing £11.5bn Affordable Homes Programme, S&P said this represents a less than five per cent increase, so funding for new homes “continues to lag rapidly rising construction costs”.

Hear from Felix Ejgel, a managing director at S&P, at the Social Housing Annual Conference, taking place on 20 November in London. Mr Ejgel will be speaking at a session entitled ‘Funders, funding and valuation’. Other speakers will include Richard Petty, head of UK residential valuation at JLL, and Pranava Boyidapu, analyst in real estate credit and securitisation research at Barclays Bank. For more information, click here.