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.
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.
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