23.11.2012 09:00
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Together Housing Finance Plc -- Moody's assigns Aa3 rating to Together Housing Group; outlook negative

Aa3 rating assigned to Together Housing Finance Plc'sGBP200 million proposed bond issuance

London, 23 November 2012 -- Moody's Investors Service has today assigned an Aa3 issuer rating to Together Housing Group (THG). In addition, the rating agency has assigned an Aa3 debt rating to the proposed GBP200 million bond issuance of Together Housing Finance Plc, which is THG's primary borrowing vehicle.

The negative outlook on the issuer rating is in line with the outlook on the UK sovereign ratings, given THG's strong financial, operational and economic linkages with the central government. The negative outlook on the debt rating mirrors the negative outlook on THG's issuer rating.

TOGETHER HOUSING GROUP

Today's rating assignment reflects the strong cash flows that THG generates from a robust foundation of low-risk social-housing letting and limited sales. The rating also incorporates Moody's assessment of a strong regulatory framework for English housing associations, and the high proportion of THG's revenues derived from government subsidies, which adds to its revenue stability.

However, the rating also takes into account uncertainties related to governance changes and THG's high exposure to floating rates. Since its creation as a group in 2011, THG has been actively restructuring its operations with the aim of strengthening its financial autonomy. With the upcoming bond refinancing, THG plans to lift legacy restrictions from its Large Scale Voluntary Transfer (LSVT) acquisitions and reduce its floating-rate debt, adding certainty to its business plan. THG's historical reliance on sales to cover its interest costs has been now fully eliminated, with no planned reliance going forward.

As per the application of Moody's Joint Default Analysis methodology for government-related issuers, THG's baseline credit assessment (BCA) has been set at baa1. The final Aa3 rating reflects the uplift provided by Moody's assessment of a very high likelihood of support from the UK government (Aaa, negative) in the unlikely event of THG experiencing acute liquidity stress.

Moody's notes that low-risk social-housing letting generated almost the entirety of THG's revenue in 2012, contributing to a social-housing-letting interest coverage of 1.9x in 2012. This is strong relative to its peers. As a result, THG has avoided a structural reliance on higher-risk activities to cover its interest costs.

THG reported a comparatively low level of sales (3% of revenue) in FY2012. Going forward, sales are projected to grow slightly and will expand into market sales, which is a new market for the organisation.

PROPOSED GBP200 MILLION BOND ISSUANCE

THG aims to issue fixed-rate 30-year bullet bonds in FY2013 via its borrowing vehicle Together Housing Finance plc. The proceeds of the bonds are expected to be used for refinancing and capital investment.

The Aa3 rating assigned to the GBP200 million bond issuance of Together Housing Finance plc is derived from the Aa3 issuer rating of Together Housing Group. Together Housing Finance plc is wholly owned and controlled by Together Housing Group, the group parent.

Accounting for the bond issuance, debt is projected to hover around its existing levels of 3x-3.5x revenue in 2013-17, which is low compared with its rated peers. Floating-rate exposure, now 42% of debt, should fall to around 20%.

The bonds are expected to be secured by a portfolio of largely social-housing-letting properties owned by three of THG's subsidiaries (Chevin Housing Association Limited, Pennine Housing 2000 Limited and Twin Valley Homes Limited). Most of the properties will be valued at Existing Use Value -- Social Housing (EUV-SH) at an asset-coverage ratio of 1.05x. Moody's views this threshold of asset coverage as offering limited enhancement for bondholders and is insufficient to lift the rating of the bonds over that of THG itself.

In addition, the bonds will have the benefit of certain unconditional and irrevocable guarantees from five of six of THG's fully owned subsidiaries, which currently represent almost the entirety of the group's stock and revenues.

The ratings assigned are based on documentation received by Moody's as of the rating assignment date. If the structures change from those in the documentation submitted, Moody's will assess the effect that these differences may have on the ratings.

WHAT COULD CHANGE THE RATING -- UP / DOWN

Whilst unlikely in the near term given the negative outlook on the sector, one of the following could have positive rating implications: (1) an operating margin improving to levels around 30% revenues, as per current projections; (2) a social-housing-letting interest coverage structurally at 2x and a recurrent cash flow interest coverage at 3x, which are levels THG aspires to achieve in the next three-to-five years; (3) debt falling below 3x revenue; (4) a reduced exposure to floating-rate debt, which is planned post bond issuance; and (5) the successful delivery of planned governance changes to strengthen internal controls.

Negative pressure could be exerted on the rating by (1) an increase in sales in excess of current plans; (2) a deterioration in its recurrent cash-interest coverage below 2.5x and a social-housing-letting interest coverage below 1.5x; and (3) debt levels that remain above 3.5x revenue. Additionally, 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.

Any change to THG's issuer rating would have a corresponding change to the debt rating of Together Housing Finance Plc.

THG was formed in April 2011 from the merger of three existing housing groups. At March 2012, homes under management were around 35,000. About two-thirds of its stock is related to LSVT acquisitions, with operations concentrated in the north of England.

PRINCIPAL METHODOLOGIES

The methodologies used in these ratings were English Housing Associations published in September 2010, and Government-Related Issuers: Methodology Update published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare each of the ratings are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

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Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

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Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Gianfilippo CarboniAsst Vice President - Analyst Sub-Sovereign Group Moody'sInvestors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 David Rubinoff MD - Sub-Sovereigns Sub-Sovereign Group JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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