Riverside Group. Update following downgrade to A1, outlook changed to stable. CREDIT OPINION 29 September 2017

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1 CREDIT OPINION 29 September 2017 RATINGS Riverside Group Domicile Long Term Rating Type Outlook United Kingdom A1 LT Issuer Rating - Dom Curr Stable Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. Contacts Jeanne Harrison VP-Senior Analyst jeanne.harrison@moodys.com Francesco Mazzoni +44 (207) Associate Analyst francesco.mazzoni@moodys.com Sebastien Hay Senior Vice President/ Manager sebastien.hay@moodys.com Riverside Group Update following downgrade to A1, outlook changed to stable Summary Rating Rationale The A1 issuer rating assigned to Riverside Group (RIV) reflects the significant improvement in RIV's operating margin and interest coverage ratios, as well as our expectation that RIV's current financial performance will improve and be sustained going forward. Management have articulated and demonstrated a continuous focus on efficiencies, while maintaining a modest growth strategy and as a result we expect that RIV's debt-to-revenue ratio will remain amongst the lowest in the rated portfolio over the medium term. RIV's liquidity position is below the rated peer median of Moody's-rated peers, however RIV's stable income stream with modest exposure to higher-risk commercial activities and very low capital expenditure do not create significant medium-term liquidity demands. The A1 rating also benefits from the strong regulatory framework governing English housing associations and our assessment that there is a strong likelihood that the UK government (Aa2 stable) would intervene in the event that RIV faced acute liquidity stress. The association is rated at the upper end of the range of Moody's-rated English housing associations, whose ratings span from A1 to Baa2. Its relative position reflects its very low debt-to-revenue ratio, very strong interest coverage, historically modest sales and very low capital expenditure (capex), but also lower operating margins and weaker immediately available liquidity position when compared to turnover. Exhibit 1 SHLIC is forecast to weaken before recovering towards the end of the forecast horizon RIVs year-on-year business plan comparison shows realised outperformance and an expected decline CLIENT SERVICES Americas Asia Pacific Japan EMEA *FY2015 and FY2016 prepared using FRS 102. ** forecast years. Source: Moody's and Riverside Group

2 Credit Strengths Credit strengths for RIV include:» Very low debt-to-assets compared to its peers, which reflects modest capex» Strong interest coverage ratios and limited exposure to commercial activities» One of the largest housing associations in the UK, with solid governance and nationwide operations» Strong regulatory framework Credit Challenges Credit challenges for RIV include:» Lower operating margins, but expected to improve» Immediately available liquidity weaker than peers» Operating environment remains challenging but policy is more stable Rating Outlook The stable outlook on Riverside Group reflects the currently stable operating environment, which is unlikely to undergo further material change in the medium-term, and the stable outlook on the sovereign rating. Recent Developments On September 26th 2017, RIV s rating was downgraded to A1 from Aa3 to reflect the close institutional, operational and financial linkages between the central government and UK housing associations (HAs), and the reduced financial resilience of the sovereign as captured by Moody's recent decision to downgrade the UK's sovereign rating to Aa2 from Aa1. The outlook has been changed to stable from negative to reflect the stable outlook on the sovereign rating, and the HA sector adapting well to a challenging policy environment, which is not expected to undergo further material change in the medium-term. Factors that Could Lead to an Upgrade Positive pressure on the rating could result from one or a combination of the following:» Further improving efficiency of operating activities resulting in operating margins rising to and sustained above 30%» Social-housing-letting interest coverage that is structurally at or above 2.5x» Debt falling below 30% of assets» Higher financial and operational flexibility demonstrated by increasing unencumbered assets and generally stronger liquidity position and/or» Reduced exposure to higher-risk commercial activities Factors that Could Lead to a Downgrade Negative pressure could be exerted on the rating by one or a combination of the following:» A significant move into typically more volatile commercial activities, which would not be compensated by a corresponding increase in operating margins and/or coverage ratios» Difficulties in delivering its planned outright sales programme or introduction of a substantially more ambitious development pipeline that would result in a material increase in debt This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history September 2017 Riverside Group: Update following downgrade to A1, outlook changed to stable

3 » A material increase in debt» A failure to effectively address the future loss in revenue from the announced rent cut and/or a general weakening in financial performance. In addition, a weaker regulatory framework, a dilution of the overall level of support from the UK government or a downgrade of the UK sovereign rating would also exert downward pressure on the rating Key Indicators Exhibit 2 RIVs results for FY2015 and FY2016 were prepared using FRS 102 Source: Moody's, Riverside Group Detailed Rating Considerations RIV's rating combines (1) its baseline credit assessment (BCA) of a2, and (2) a strong likelihood of extraordinary support coming from the UK government in the event that RIV faced acute liquidity stress. Baseline Credit Assessment VERY LOW DEBT-TO-ASSETS COMPARED TO ITS PEERS, WHICH REFLECTS MODEST CAPEX RIV has had very low and stable debt over the last five years, we consider this a key credit strength when compared to rated peers. At FYE2016, RIV's debt was GBP785 million, equivalent to 2.1x revenues and 41% of assets at cost, and broadly in line with the 2.3x and 37% recorded the year before. This compares favourably with 2015 portfolio medians of 4x and 48% respectively. RIV's low debt is credit positive as it provides financial flexibility via a less rigid expenditure structure and a balance sheet capable of supporting additional borrowing if necessary. The debt to revenue ratio has been stable over the last five years ranging from 2.3 to 2.6x, which is mainly a result of Riverside's modest capex, and demonstrates management's commitment to remain within RIV's capacity. Net housing capex averaged 12% over FY , notably below the rated peers' average of 27%. Going forward, RIV's investment activity is projected to increase but remain relatively modest, net housing capex will average 7% over FY , up from 4% over the same period in the previous business plan. RIV plans on developing an average of 635 units per annum during the first five years of its business plan, an increase from an average 500 units per annum that were to be built under the previous business plan. Across the wider RIV group, which includes Irvine Housing Association, Prospect (GB) Ltd, and Compendium (RIV's share), an average of 1000 units will be built per annum over the first five years of the plan. The uptick in development, while still modest given the size of the housing association, signals a change in direction for RIV. RIV projects that debt will peak at GBP894 million by FYE2019. Over the forecast period FYE , debt to revenue is forecast to increase marginally to 2.2x from 2.1x, peaking at 2.5x at FYE2019, even with the peak at FYE2019 debt to revenue stays within its historic range of x. Similarly, debt to assets remains largely unchanged at 38% by FYE2020 (FYE %). RIV does not have a specific target for its exposure to interest-rate risk, but has historically viewed holding around 80% of total debt at fixed rates as an optimal mix. As of August 2016, RIV's hedging position was out of line with this target, as approximately 95% of its debt was held at fixed rates. This is above the current average of its Moody's-rated peers, meaning that RIV's coverage ratios will not benefit from the current low interest rate environment. The variable interest rate exposure could potentially reach 37% when accounting for cancellable hedging contracts. Hedging is carried out via a mix of embedded and standalone interest-rate swaps, which 3 29 September 2017 Riverside Group: Update following downgrade to A1, outlook changed to stable

4 introduce margin-call risk. As of the end of November 2015, the nominal value of standalone swap contracts was GBP252 million, or 32% of total drawn debt (which is high compared to Moody's-rated peers) and their marked-to-market value was negative GBP36 million. RIV has one swap counterparty exposure that exceeds its security threshold, this resutled in RIV posting GBP12.8 million of cash collateral in respect of that counterparty. STRONG INTEREST COVERAGE RATIOS AND LIMITED EXPOSURE TO COMMERCIAL ACTIVITIES Since FY2011, RIV has successfully implemented a programme of efficiency savings, that have, along with increased revenues from social housing lettings, FTSO and outright sales, supported a strong growth in cash flow from operations. However, in FY2016 RIVs CFO dropped to GBP86 million from GBP117 million the previous year, reflecting a GBP8 million decrease in operating surplus on a cash basis and a GBP27 million increase in debtors. In FY2016, RIV's cash interest coverage ratio fell to 2.2x from 3.3x, while cash volatility adjusted interest cover fell to 1.8x from 2.7x. The FY2015 portfolio median for cash interest coverage and CVIC was 2x and 1.5x respectively. While RIV's social housing letting interest coverage ratio (SHLIC), which measures an entity's ability to cover interest from core social activities, fell to 1.6x from 2x in FY2015, it significantly outperforming the budgeted 1x cover (see Exhibit 2)(FY2016 A1 median 2.6x). RIV's FY2016 ability to service its debt from core activities remains strong, but is at the lower end of the A1 rated peers. RIV is projecting that SHLIC will decline to 1.1x by FY2018, before rising to 1.7x in FY2021. This is the result of GBP27.2 million in expenditure mitigation to be spent over FY on efforts to reduce ongoing costs and to exit defined benefit pension schemes to compensate the impact of the 1% social housing rent cut. While exiting the pension schemes has an upfront cost, it is expected to generate ongoing annual savings of approximately GBP1 million. RIV also has a very high LIBOR assumption of 7% for all existing and new variable rate debt from year one in the business plan, as well as a provision of GBP 11 million and GBP 5 million in year one and two of the business plan respectively to provide for breakage costs that may be incurred due to refinancing. Our expectation, which is reflected in the current rating, is that RIV will materially outperform the projected coverage ratios as a result of prudent assumptions on the level of expenditure mitigation costs and LIBOR rates that have been built into the business plan. If RIV were unable to realise its planned cost savings and outperform these projected interest coverage ratios, however, this would exert negative pressure on the rating. RIV derives a higher proportion of its turnover (GBP283 million in FY2016) from low-risk social housing lettings compared to similarly sized national peers, which enhances the stability and predictability of RIV's cash-flows. In FY2016, the percentage of turnover derived from low-risk social housing letting fell to 77% from 85%. The decrease was driven by GBP37 million of income recognised within Riverside Estuary Ltd for the Hull Extra Care PFI contract, excluding the PFI contract from total revenue the percentage of turnover derived from low-risk social housing lettings would have been 86%. Higher-risk activities, especially development-for-sale and market rent, contributed 8% and 1% respectively to turnover in FY2016, compared to peer averages of 11% and 1%. Going forward, we expect that the stability of RIV's turnover will be preserved as RIV does not project any substantial diversification of its income stream. Turnover is projected to reach GBP375 million by FY2020, roughly GBP30 million lower than previously forecast due to the negative impact of the 1% social rent reduction offset by some mitigation efforts. However, the business plan is showing an increase in revenue from sales compared to the pre-rent cut business plan. When combined with the lower social rental revenues, this increase leads to sales contributing to a bigger share of total revenues, reaching 15% of turnover by FY2019 and remaining at that level until 2021, higher than the 12% peak seen in the pre-rent cut business plan. RIV also generates around GBP27 million of its turnover (FY2016) from low-margin short-term supporting people contracts. While these contracts may give rise to revenue volatility given their short length (typically three years and more recently 12 months), the associated expenditures could be reduced if the contract were terminated. Another area of future growth identified by RIV's management is the provision and management of extra care units. However, its contributions to total turnover should be minimal over the medium term. ONE OF THE LARGEST HOUSING ASSOCIATIONS IN THE UK, WITH SOLID GOVERNANCE AND NATIONWIDE OPERATIONS 4 29 September 2017 Riverside Group: Update following downgrade to A1, outlook changed to stable

5 The number of RIV homes under management totalled 52,945 at March Its housing stock decreased marginally due to programme of active asset management, which aims to consolidate Riverside's geographical footprint. The decrease resulted from disposals being higher than new units built and those acquired via RIV's engagement in an acquisition programme to acquire new stock in areas where RIV already has density. From FY , Riverside reduced the number of local authorities (LAs) it operates in by 19 to 160, with 69% of the stock concentrated in 10 LA s and 81% of stock concentrated within 20 LA s. This strategy of reducing its footprint is set to continue at least until FY2017 and reflects an aim of RIV to gradually withdraw from LAs where it manages less than 50 units and increase its presence where it currently has sufficient stock density. Although RIV's operations are spread nationally, there is a concentration of stock in the North of England where social housing rents are much closer to market rents compared to the South of England. RIV has also had a presence in Scotland since October 2011 via its wholly owned subsidiary, Irvine Housing Association. RIV's senior management team has a clear vision to make the organisation leaner, more efficient and performance driven. RIV has delivered all the savings outlined in budgets for FYs , resulting in substantial improvements in RIV's operating performance. In FY2016, RIV made GBP1.9 million in people savings and took steps to address its defined benefits pension risks, closing the scheme to future accrual and exit from Local Government Pension Scheme is underway. RIV has also ceased accruing to the SHPS defined benefit scheme. Management has also demonstrated caution by not pursuing a significant merger opportunity in FY2013 with a struggling housing association, as the due diligence process showed that the risks and uncertainties involved in the transaction exceeded the level the management was willing to accept. The decision highlighted that preserving the soundness of the existing business, rather than growth, is the key priority of current management. Management has indicated that merger is an option for growth, but the business case would have to be strong. RIVs prudence is further highlighted by its limiting of development to a scale that the business plan can comfortably accommodate, which has typically been around 500 units a year (excluding development for sale), which is modest compared to its size. Given the financial impact of the rent cut, the number of units developed per year is increasing to 635 per annum on average over the first five years of the business plan, before stepping down to 300 per annum. Development will peak at 1,184units in FY2021 (for details see section, Very Low Debt-to-Assets Compared To Its Peers, Which Reflects Modest Capex). The cautious approach to business planning is mostly evidenced by intentionally created expenditure contingency and the exceptionally high LIBOR assumption of over 7% for current and future variable-rate drawdowns starting in FY2016. Treasury policy stipulates that the cash need projected for next month must be available in cash, while facilities available for immediate drawdown must be able to cover the next 12 months and total facilities to cover 18 months, which is on the prudent side compared to rated peers. STRONG REGULATORY FRAMEWORK The sector s credit quality will continue to benefit from the strong regulatory framework and oversight by the Homes and Communities Agency (HCA). The HCA maintains strong oversight through quarterly returns, long-term business plans, annual reviews, and undertaking In-Depth Assessments of entities where deemed necessary. Additionally, the HCA has powers to make board member and manager appointments where there has been a breach of Regulatory Standards. From October 2017, the HCA will charge fees for social housing regulation, as a means of enhancing the independence and maintaining the effectiveness of the regulator September 2017 Riverside Group: Update following downgrade to A1, outlook changed to stable

6 LOWER OPERATING MARGINS, BUT EXPECTED TO IMPROVE RIV's operating margin has been historically low compared to its rated peers, especially to peers in its current BCA category, and is one of the factors constraining RIV's rating. However, we note that the margin is high enough to enable RIV to post high interest coverages and fund a significant portion of its development needs from internally generated cash, given its financial profile characterised by very low debt levels and modest capital expenditure. Therefore, the lower margin does not prevent RIV from being positioned at the top end of our current rated universe. However, RIV's current position amongst rated peers also factors in our expectation that management will remain committed to seeking efficiencies, which will further improve Riverside's operating performance. Given the change in the operating environment post-july budget, this has become more pertinent. RIVs operating margin fell to 20% in FY2016 from 25% in FY2015, leaving it significantly below the 36% median margin for Moody's A1 rated peers. If the GBP37 million in turnover from the Hull Extra Care PFI contract is removed from turnover, along with its marginal contribution to the operating surplus, RIVs operating margin would have been 22% for FY2016. RIVs margin has strengthened, however, over the last four years from 15% in FY2012. The improvement was mainly driven by management's targeted focus on performance and tight cost control throughout the organisation announced in its 2013 corporate plan, the tailing-off of a large programme of investment in existing units and ongoing stock rationalisation efforts. Management projects that RIV will get close to reaching its long-term margin target of 25% of turnover in FY2020 based on the FY business plan. However, RIVs operating margin is forecast to drop to 18% in FY2017, with profitability being affected by the rent cut along with provisions for pension exit costs and business restructuring within the business plan. Supported by its track record, we expect that RIV will successfully implement its efficiency plans and improve its margins over the medium term. Exhibit 3 RIVs operating margin has consistently outperformed budget, but is forecast to decline before recovering RIVs year-on-year business plan comparison shows the impact of the rent cut on forecast profitability *FY2015 and FY2016 prepared using FRS 102. ** forecast years. Source: Moody's and Riverside Group 6 29 September 2017 Riverside Group: Update following downgrade to A1, outlook changed to stable

7 IMMEDIATELY AVAILABLE LIQUIDITY WEAKER THAN PEERS As of August 2016, RIV's immediately available liquidity, represented by cash and fully secured undrawn facilities, increased to GBP174 million from GBP167 million in January While this is a significant improvement on the GBP82 million RIV had two years ago RIV's immediately available liquidity represents only 48% of turnover, which is weak compared with the rated portfolio average of 100%. However, we note that RIV's more stable revenue base with a higher proportion of social housing letting, a modest development pipeline and historically strong cash flows from operations to support investment do not create significant medium-term liquidity demands. The current immediately available liquidity is sufficient to cover over two years of forecast cash requirements, which demonstrates that the liquidity is more than adequate when measured against RIV's conservative business model, especially given that RIV's own liquidity guidelines stipulate that immediately available liquidity has to cover at least 12 months of cash requirements. In addition, management improved RIV's liquidity position by increasing the capacity of available facilities, which will now be maintained at a higher level going forward to gain more flexibility and be able to respond to opportunities when they arise. We view this strategy as credit positive. RIVs unencumbered assets position, an important measure of latent funding flexibility, is adequate, estimated at GBP542 million on a EUV-SH basis as of January This could provide additional liquidity of around GBP516 million or 141% of turnover, compared to current peers' median of 205%. OPERATING ENVIRONMENT REMAINS CHALLENGING BUT POLICY IS MORE STABLE Moody s does not expect additional material adverse policy shifts for the sector and considers the operating environment to be stable in the medium term. Adverse policies announced in the last few years will continue to negatively impact revenues, especially the effects of the 1% annual decrease in social rents (until FY2020) and Universal Credit (a pillar of broader welfare reform measures). However, HAs have demonstrated resilience to adverse policies to date and been proactive to mitigate the impact. A reduction of capital grant for new social housing over the last five years has led to increased exposure to market sales activity, which has more than doubled since 2012 to reach 17% of turnover for Moody s rated HAs in FY2016. Credit risk association with exposure to market sales is incorporated in BCAs. Extraordinary Support Considerations The strong level of extraordinary support factored into the rating reflects the wide-ranging powers of redress available to the regulator in cases of financial distress, with the possibility of a facilitated merger or a transfer of engagements. Recent history has shown that the UK government (Aa2 stable) is willing to support the sector, as housing remains a politically and economically sensitive issue. The strong support assumption also factors increasing exposure to non-core social housing activities in the sector, that add complexity to HA operations, and the weakening of the sovereign s financial resilience, making an extraordinary intervention slightly more challenging. In addition, our assessment that there is a very high default dependence between (HA) and the UK government reflects their strong financial and operational linkages September 2017 Riverside Group: Update following downgrade to A1, outlook changed to stable

8 Rating Methodology and Scorecard Factors European Social Housing Providers, July 2016 (190944) Government Related Issuers, August 2017 ( ) Ratings Exhibit 4 Category RIVERSIDE GROUP Outlook Issuer Rating -Dom Curr RIVERSIDE FINANCE PLC Outlook Senior Secured -Dom Curr Source: Moody's Investors Service Moody's Rating Stable A1 Stable A September 2017 Riverside Group: Update following downgrade to A1, outlook changed to stable

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10 CLIENT SERVICES Americas Asia Pacific Japan EMEA September 2017 Riverside Group: Update following downgrade to A1, outlook changed to stable