Research Update: U.K.-Based Housing Association Notting Hill Home Ownership Assigned 'AA' Rating; Outlook Primary Credit Analyst: Hugo Foxwood, London (44) 20-7176-3781; hugo.foxwood@standardandpoors.com Secondary Contact: Robin Froggatt-Smith, London (44) 20-7176-3609; robin.froggatt-smith@standardandpoors.com Table Of Contents Overview Rating Action Rationale Outlook Related Criteria And Research Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JANUARY 20, 2015 1
Research Update: U.K.-Based Housing Association Notting Hill Home Ownership Assigned 'AA' Rating; Outlook Overview Notting Hill Home Ownership (NHHO) is a U.K.-registered provider of social housing, focused on developing and managing shared ownership properties in London. We view NHHO as having a core group status within the Notting Hill Housing Group, and hence we equalize its rating with its parent, Notting Hill Housing Trust. We are therefore assigning our 'AA' long-term issuer credit rating to NHHO. The stable outlook mirrors our outlook on Notting Hill Housing Trust, and reflects our view of both the likely continuity of government support, and the stability of Notting Hill's underlying credit quality. Rating Action On Jan. 20, 2015, Standard & Poor's Ratings Services assigned its 'AA' long-term issuer credit rating to U.K. social housing provider Notting Hill Home Ownership. The outlook is stable. Rationale The 'AA' rating on Notting Hill Home Ownership (NHHO) is equalized with that on Notting Hill Housing Trust, the parent of the entities forming the Notting Hill Housing Group. This reflects our assessment of NHHO's status as core within the Notting Hill Housing Group. NHHO is the largest subsidiary within the group, generating about one-third of group turnover in the financial year ending March 31, 2014, and the majority of the group's surplus. We also view its provision of shared ownership as an integral part of the group's mission to develop and manage social housing. Consequently, we have equalized the rating on NHHO with that on the Notting Hill Housing Trust. The 'AA' rating on the Notting Hill Housing Trust is based on its stand-alone credit profile (SACP), which we assess at 'aa-'. It is also based on our opinion that there is a moderately high likelihood that the U.K. government, working through the Homes and Communities Agency (HCA), would provide timely and sufficient extraordinary support to Notting Hill in the event of financial distress. In accordance with our criteria for government-related entities (GREs), we base our view of the likelihood of extraordinary government support on our assessment of Notting Hill's important public policy role for the U.K. government, and its strong link with the U.K. government through the funding and regulation provided via the Greater London Authority and the HCA. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JANUARY 20, 2015 2
Research Update: U.K.-Based Housing Association Notting Hill Home Ownership Assigned 'AA' Rating; Outlook Notting Hill's SACP is supported by its very strong enterprise profile. Operating in an industry that we assess to be low risk, Notting Hill benefits from the extremely high demand for social housing in London, and a strong management team with a track record of developing properties for sale. Operational performance is good in terms of voids, although arrears are high compared with Notting Hill's London-based peers. The SACP also reflects Notting Hill's very strong financial profile. Notting Hill's development strategy has enabled it to improve EBITDA margins substantially over the past five years, resulting in low debt to EBITDA in comparison with rated peers. That said, we recognize there is a substantial exposure to the volatility associated with London's property market. We also view Notting Hill's financial policies and liquidity position as very positive for the rating. Notting Hill is one of London's major housing associations, with 28,418 units under management, and a track record of delivering large development programs. About twothirds of the group's turnover in 2014 was made up of rental income from traditional social housing, shared ownership, and from managing temporary accommodation. Importantly, as a major developer in London, Notting Hill also generated 27% of its turnover (2013: 39%) from developing properties for sale both on the open market and for shared ownership. Notting Hill is a leading player among London housing associations in the provision of shared ownership. Although Notting Hill is therefore exposed to the London property market, we believe the associated credit risks are at least partially mitigated by its established track record of managing large development programs, and by the very strong demand for and acute shortage of affordable housing in most areas of London. Other risks could arise from the implementation of welfare reforms, and in particular the move to universal credit, which could increase levels of arrears. Notting Hill's arrears are at the high end of its London peer group, but we note they have reduced noticeably over the past year, and voids are low. Notting Hill's EBITDA margins (adjusted for capitalized repairs) have improved consistently in recent years as the London property market has recovered, rising steadily from 15% of turnover in 2010 to 32% in the financial year ending March 31, 2014 (financial 2014). We believe that margins will continue to improve on the back of increasing property sales, and forecast that EBITDA will rise to 38% by 2017. Although this is based on the relatively conservative assumption of house prices rising by just 0.5% annually, generating this level of EBITDA will depend on conditions in the London housing market. In the event of a cyclical stress in the housing market, we note that Notting Hill has some capacity to switch properties intended for outright sale over to rental or shared ownership, positioning it to meet what we believe will be very strong structural demand for the foreseeable future. If EBITDA continues to grow as we expect, we forecast that debt/ebitda will fall to less than 10x from 2016. As a further positive factor, Notting Hill benefits from high levels of unencumbered security, with a potential value that comfortably exceeds 50% of debt outstanding. We also note that Notting Hill has adopted a cautious approach to debt management, with high levels of fixed-rate debt (88% of its portfolio) and long maturities (an average of 25 years). In general, we believe WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JANUARY 20, 2015 3
Research Update: U.K.-Based Housing Association Notting Hill Home Ownership Assigned 'AA' Rating; Outlook that Notting Hill operates with a high degree of transparency, and has demonstrated comprehensive access to the key information necessary to budget and manage risks effectively. Liquidity We assess Notting Hill as having a very strong liquidity position. Operating cash flows are stable and predictable, and although holdings of cash are limited, the group has arranged committed facilities to meet its cash flow needs. Its existing sources of liquidity exceed its currently expected uses over the next 12 months by 1.75x. Given Notting Hill's track record in accessing the capital markets, and securing low margins relative to the sector, we view the group s access to external liquidity as strong. Outlook The stable outlook reflects our view of both the likely continuity of government support, and the stability of Notting Hill's underlying credit quality. We anticipate that Notting Hill will improve on its financial performance, reporting adjusted EBITDA margins averaging 36% of revenues in 2015-2017, assuming a stable London housing market. The rating could come under pressure if volatility in the London housing market depresses property sales, leading to a decline in EBITDA well below 30% of revenues, and causing debt/ebitda to materially increase. If we also perceived a reduction in Notting Hill's ability to access the capital markets, then we could lower the rating. We could raise the rating if arrears fall to below 6% of rent receivable and EBITDA rises to more than 40% of revenues as a result of both improved cost control and a buoyant London housing market. Raising the rating by one notch would involve a twonotch improvement in the SACP, which is unlikely over the next two years. Related Criteria And Research Related Criteria General Criteria: Group Rating Methodology - November 19, 2013 General Criteria: Principles Of Credit Ratings - February 16, 2011 Related Research U.K. Social Housing Risk Indicators, Oct. 27, 2014 Notting Hill Housing Trust, Oct. 20, 2014 Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JANUARY 20, 2015 4
Research Update: U.K.-Based Housing Association Notting Hill Home Ownership Assigned 'AA' Rating; Outlook Ratings To From Notting Hill Home Ownership Ltd. Issuer credit rating Foreign and Local Currency AA//-- -- Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420- 6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JANUARY 20, 2015 5
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