May 30 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Genesis Housing Association and Great Places Housing Association at ‘AA-’ and revised the Outlooks to Negative from Stable. This revision reflects the weakened operating environment and increased challenges faced by registered providers (RPs) in England. A full list of rating actions is at the end of this press release.
Fitch considers the regulatory framework for English social housing to have a robust legal basis as well as exercising sound control and tight monitoring of RPs through the Homes and Communities Agency (HCA). This was reflected in a two notch enhancement to the standalone credit fundaments of RPs. However, recently the sector is facing more exposure to business risks, with an expansion into non-social housing and increasing development activities, and although public funding and regulatory oversight are still strong credit factors supporting the ratings, this is not as robust as it once was.
Fitch applies its public-sector entities criteria for the rating of RPs and adopts a bottom-up approach. RPs’ ratings are therefore not credit linked and do not automatically move in line with the ratings of the UK sovereign (‘AA+'/Stable). Through its bottom-up approach, Fitch first assesses the RP’s credit profile. The standalone assessment of each RP takes into account factors such as demand, operational efficiency, debt dynamics and management. It also factors in the strong quality of the RP’s cash flow through direct government funding. This provides two notches of uplift from the standalone assessment and underpins the agency’s expectation that a large number of RPs would achieve ratings at a high investment grade level.
However, RP’s cash flows will be directly negatively impacted by welfare reforms and the regulatory oversight is no longer as strong as it once was. As a result Fitch has revised the sector’s outlook to negative until the agency assesses the impact on arrears of the direct payment of housing benefits to tenants rather than, as previously, to the RP. Also the agency will monitor any changes to the regulatory role of the Homes and Communities Agency (HCA) as indicated through the recent consultation paper. Any weakening in the agency’s assessment of the strong cash flow would have a direct negative impact on the standalone assessment of the RP and any dilution of control and oversight could result in a narrowing of the uplift from two to one notch.
On average, 70% of RPs’ revenue comes from the government through housing benefit, reflecting strong government indirect support towards RPs’ revenues. However, rental flows will be changing and RPs that have traditionally received a high level of turnover from social housing have now seen their revenue streams become more volatile.
Fitch notes that RPs performed strongly in 2011-2012, with RPs continuing to grow their asset base and recording an aggregate surplus of GBP1.8bn. Fitch however believes the sector as a whole is prone to face new challenges as well as uncertainty surrounding the financial and housing markets, diversification into other sectors, and increasing development activities. Overall Fitch considers that the sector’s aggregated debt is expected to increase significantly in the medium term. The sector will also be seeing a rising debt burden and banks loan covenants may have to be renegotiated in order to avoid being breached.
HCA has published a consultation paper on the principles for regulating social housing in England. Although Fitch believes that the role of the regulator is still strong as demonstrated in their recent action over Cosmopolitan, the sector will need to adapt to the way it regulates in light of adapting to more diverse activities. In Fitch’s view the outcome of the case of Cosmopolitan and its eventual merger with Sanctuary has shown that the regulator is capable of safeguarding the RPs assets and ensuring that tenants and taxpayers interests were protected. However, the regulator will now focus on protecting only social housing assets.
Fitch rates the housing association entities and thus the focus is not only on the protection of the social housing assets but the ability of the entity to repay its debt. Thus if the regulation is more focused on solely the social housing activities of the registered provider, the regulation from Fitch’s perspective is less thorough than it once may have been.
As the market evolves and activities widen, the regulator will have to deal with more complex and commercial providers and will consequently spend less time on routine engagements such as annual meetings with smaller landlords. The regulator will increasingly look for assurance from the boards that risks are being effectively managed.
Any future changes to regulation of the sector which may hinder the operations of registered providers in particular the focus on ring fencing social housing assets and protecting these from commercial risks will be monitored by Fitch. There is still considerable uncertainty around the full impact of the welfare reforms. Additionally there is also much uncertainty around what will happen post April 2015, once the affordable homes programme has come to an end.
The Negative Outlook reflects the following risk factors that may, individually or collectively, lead to a downgrade:
-The two notch uplift could be narrowed to one notch if Fitch considers that the changes to regulation of the sector would result in weaker oversight. Fitch is expected to assess this early next year
-The standalone credit profile of the individual RPs may be lowered if the direct payment of housing benefit to tenants results in a significant increase in arrears
-Further increased volatility in operating revenue as a result of higher exposure to development activities and a significant increase in gearing
The rating actions are as follows:
Genesis Housing Association Limited
Long-term foreign and local currency ratings affirmed at ‘AA-'; Short-term rating affirmed at ‘F1+'; Long-term ratings Outlook revised to Negative from Stable
Great Places Housing Association Limited
Long-term foreign and local currency ratings affirmed at ‘AA-'; Short-term rating affirmed at ‘F1+'; Long-term Outlook revised to Negative from Stable