Key Drivers of Moody's Downgrade of English Housing Associations

Transcription

1 MAY 17, 2013 SPECIAL COMMENT Key Drivers of Moody's Downgrade of English Housing Associations Table of Contents: SUMMARY RATING ACTIONS TAKEN 1 2 DRIVERS OF THE REVIEW 2 APPENDIX 5 MOODY S RELATED RESEARCH 7 Analyst Contacts: LONDON Roshana Arasaratnam Vice President - Senior Analyst roshana.arasaratnam@moodys.com Elizabeth Bergman Analyst elizabeth.bergman@moodys.com David Rubinoff Managing Director - Sub Sovereigns david.rubinoff@moodys.com Summary On 17 May 2013, we downgraded the issuer and debt ratings of all but one rated housing association in the UK following a revision of the level of extraordinary support factored into their ratings from high to strong (with one exception). This concluded the review for downgrade initiated on 25 February All ratings now carry a stable outlook. The revision in the support assessment reflects challenges for the regulator, the Homes and Communities Agency (HCA), to step in and protect entities and their creditors in extreme situations. Many of the same issues were highlighted in facilitating the long-term viability of Cosmopolitan Housing Group, ensured in a merger with Sanctuary Group. This episode served to illustrate the difficulties in ensuring a satisfactory outcome when a housing association encounters financial distress. The recent discussion document issued by the regulator on proposals to adjust the regulatory framework leads Moody s to be more cautious in its assessment of the likelihood of timely government action. This report provides an overview of the rationale for the recent downgrade.

2 Rating actions taken We downgraded by one notch 29 of the 30 rated housing associations, which concluded the review for downgrade initiated in February. Ratings now range from Aa3 to Baa3 and all entities carry a stable outlook. The rating actions reflect our reassessment of likelihood of extraordinary support from the UK government, moving to strong from high in light of ongoing developments in the sector. The one exception is Assettrust, for whom our support assumption is now moderate, down from strong, reflecting particular challenges in the provision of extraordinary support. While this reassessment has resulted in a sector-wide impact across rated entities, we also examined factors which might support a differentiation in the level of support. However, these factors, which are also captured in the baseline credit assessment, are counter-balancing in nature. Therefore, we have only made this distinction for one entity, as was the case before the review. Despite having different relative exposure to non-social housing activities, we believe that creditworthiness of all rated entities still benefits from actions taken by the regulator or the sector itself in order to prevent an adverse outcome for any creditor. Affinity Sutton Group s Aa3 rating was confirmed, which reflects the strength of its standalone credit profile, while also benefitting from a similar level of extraordinary support as its rated peers. For a full list of English housing associations rated by Moody s, see the Appendix on page 5. Drivers of the review The ratings of housing associations were originally placed on review for downgrade in February to account for changes in the sector s operating and regulatory environment, as highlighted by: (1) the financial distress faced by Cosmopolitan Housing Group and the uncertainty regarding its resolution; and (2) the publication of a discussion document on potential changes to the regulatory framework, which was expected to give insight into how the HCA may differentiate between different types of assets and activities, when providing extraordinary support to a housing association in financial distress. Increasing risks will challenge the regulator The UK government continues to exert strong oversight of the English housing association sector via the HCA. Aside from providing ongoing capital funding, the HCA is also responsible for supervising the sector and can intervene to assist housing associations facing financial distress. However, the discussion document 1 highlighted the key challenges it faces in this regard. These include (1) how to protect social-housing assets in times of financial distress; and (2) how to regulate the sector effectively, as some housing associations have diversified and are therefore exposed to different risks, particularly from non-social-housing activities. The document proposed making these risks more transparent through the potential introduction of a number of measures such as ring-fencing and living wills. However, the practical implementation of these proposals will be challenging and it is unclear whether they will effectively improve intervention and oversight. The powers of the regulator, which are set out in the Housing and Regeneration Act 2008 and amended in the Localism Bill 2011, have not changed. 1 Protecting social housing assets in a more diverse sector 2 MAY 17,2013 SPECIAL COMMENT: KEY DRIVERS OF MOODY'S DOWNGRADE OF ENGLISH HOUSING ASSOCIATIONS

3 These challenges are exemplified by the case of Cosmopolitan Housing Group The changes in the sector were recently demonstrated by the near default of Cosmopolitan Housing Group (unrated) on its lease payments earlier this year. The HCA eventually secured a rescue deal, with Cosmopolitan s March lease payments ultimately paid through asset sales, while its long-term viability was achieved through its amalgamation into Sanctuary Group (A1, stable). Although resolved, it highlighted (1) the risks associated with non-core social-housing activities, which were responsible for Cosmopolitan s financial problems; and (2) the practical barriers in implementing a rescue programme in a timely fashion. Even with willing partners, there were still practical difficulties which delayed the resolution. Moreover, one of the possible outcomes would have ultimately led to a loss to lenders. The HCA demonstrated its willingness and capacity to broker solutions from behind the scenes. The resolution, however, underlined the sector s ability to protect itself prior to formal government intervention, which differentiates it from two previous cases of near default: (1) West Hempstead Housing Association, where the Secretary of State guaranteed a line of credit; and (2) Ujima Housing Association, where the regulator s formal moratorium powers were required to transfer assets and liabilities to a stronger housing association. Extraordinary support diminished, but still strong HCA s oversight and willingness to intervene to ensure the financial stability of the sector continue to provide uplift to ratings. However, we believe events suggest that the government may become more selective in providing extraordinary support to housing associations in the future, which exposes creditors to heightened risks. As a result, we have reassessed our estimate of extraordinary support factored into the ratings downwards. Comparing issuer and debt ratings of English housing associations During the review, we also considered whether we need to distinguish between the levels of protection offered to bond holders, secured by social housing assets, compared to other creditors. We currently assign the same rating to a housing association s issuer (senior unsecured) and bond (senior secured) ratings. This reflects the following: (1) Insufficient operating or legal separation within housing associations to justify a distinction between the ratings. In other sectors, where we make a rating distinction on the rating of secured debt, there is effective ring-fencing of assets. The highly integrated nature of housing associations means the debt servicing of the entity issuing debt and the housing association are strongly linked. If the HCA s ring-fencing proposal is implemented and supported by effective legal covenants, we would likely reconsider this position. (2) The difference between secured and unsecured creditors is not significant enough to warrant a rating distinction given the HCA s commitment to protecting the housing association as an entity, at least until a moratorium had been triggered. (3) The creditworthiness of the bonds and the group parent or main operating subsidiary are linked by cross default (or acceleration) provisions in many instances. 3 MAY 17,2013 SPECIAL COMMENT: KEY DRIVERS OF MOODY'S DOWNGRADE OF ENGLISH HOUSING ASSOCIATIONS

4 Stable outlook, reflecting resilience to other challenges facing the sector English housing associations remain exposed to socio-economic conditions and to changes in government fiscal policies. In particular, the impact of the introduction of Universal Credit remains a risk for the sector (for more information, please refer to our Special Comment). 2 In addition, changes to the rent-setting formula due to be announced as part of the Comprehensive Spending Review (CSR) may change the revenue flexibility of entities. Moreover, housing associations may face further pressures if there are more reductions in welfare expenditure beyond those already announced as part of the previous CSR and the Autumn Statement. We currently assess these risks as manageable for the rated entities, and this medium term resilience is reflected in their stable outlooks and current baseline credit assessments. 2 UK Housing Benefit Reforms: Credit-Negative Impact, but Rating Outlooks on UK Housing Associations Remain Stable, March 2011 (131801) 4 MAY 17,2013 SPECIAL COMMENT: KEY DRIVERS OF MOODY'S DOWNGRADE OF ENGLISH HOUSING ASSOCIATIONS

5 Appendix Former Rating/ Outlook Current Rating/ Outlook English housing association: issuer and debt ratings Rating Outlook Rating Outlook Affinity Sutton Group Ltd Aa3 RUR-dwn Aa3 Stable Affinity Sutton Capital Markets plc Aa3 RUR-dwn Aa3 Stable AmicusHorizon Limited AmicusHorizon Finance Plc Assettrust Housing Association Limited Baa2 RUR-dwn Baa3 Stable B3 Living Limited A2 RUR-dwn A3 Stable Circle Circle Anglia Social Housing Plc Devon and Cornwall Housing Association East Thames Group limited East Finance Plc Family Mosaic Genesis Housing Association Genfinance II Plc Great Places Housing Group Hanover Housing Association Hastoe Housing Association Hastoe Capital Plc Hyde Group Hyde Housing Association Limited L&Q Group London & Quadrant Housing Trust Longhurst Group Ltd Libra (Longhurst Group) Treasury Plc Midland Heart Midland Heart Capital Plc Moat Homes Moat Homes Finance Plc Newlon Housing Trust Notting Hill Housing Group Notting Hill Housing Trust Peabody Trust Peabody Capital Plc Places for People Homes Limited Places for People Capital Markets PLC Radian Group Limited Radian Capital Plc 5 MAY 17,2013 SPECIAL COMMENT: KEY DRIVERS OF MOODY'S DOWNGRADE OF ENGLISH HOUSING ASSOCIATIONS

6 Former Rating/ Outlook Current Rating/ Outlook English housing association: issuer and debt ratings Rating Outlook Rating Outlook Raglan Housing Association Limited Raglan Finance Plc Riverside Group Saffron Housing Trust Sanctuary Housing Association Sanctuary Capital Plc Saxon Weald Homes Ltd Saxon Weald Capital plc Sovereign Housing Association Sovereign Housing Capital, PLC Together Housing Group Together Housing Finance Plc WM Housing Group WM Treasury Plc 6 MAY 17,2013 SPECIAL COMMENT: KEY DRIVERS OF MOODY'S DOWNGRADE OF ENGLISH HOUSING ASSOCIATIONS

7 Moody s Related Research Issuer Research:» Assettrust Housing Association» Devon and Cornwall Housing Association» Riverside Group Sector Comments:» English Housing Associations: Lingering Downside Risks Despite Positive 2012 Results, December 2012 (147746)» UK Housing Benefit Reforms: Credit-Negative Impact, but Rating Outlooks on UK Housing Associations Remain Stable, March 2011 (131801) Special Comments:» Key Drivers of Moody's Actions on UK Sub-Sovereign Ratings, February 2013 (150518)» Vestia's Margin Call Not Indicative of Moody's Rated English Housing Associations, March 2012 (140804)» English Housing Associations: Negative Sector Outlook Mirrors UK Sovereign Rating, Given Strong Linkages, February 2012 (139568) Rating Methodologies:» English Housing Associations, September 2010 (122575)» Government-Related Issuers: Methodology Update, July 2010 (126031) To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients. 7 MAY 17,2013 SPECIAL COMMENT: KEY DRIVERS OF MOODY'S DOWNGRADE OF ENGLISH HOUSING ASSOCIATIONS

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