The negative outlook on WMH's issuer rating is in line with the outlook on the UK sovereign ratings, given WMH's strong financial, operational and economic linkages with the central government.
Today's rating assignment reflects the strong, but weakening cash flows that WMH 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 revenue that WMH derives from government subsidies, which adds to its revenue stability.
However, Moody's notes that the rating is constrained by the expected increase in WMH's debt levels from a low base in order to support future capex and a planned debt restructuring. The latter is meant to lift legacy restrictions on governance from recent acquisitions.
As per the application of Moody's Joint Default Analysis methodology for government-related issuers, WMH's baseline credit assessment (BCA) has been set at baa2. 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 WMH experiencing acute liquidity stress.
Moody's notes that low-risk social-housing letting generated 92% of WMH's revenue in 2012, contributing to a social-housing-letting interest coverage of 1.7x. As a result, WMH has avoided a structural reliance on higher-risk activities or sales to cover its interest costs. Moody's notes that WMH's sales are anticipated to grow to 5% of revenues in 2013, from 3% in 2012, which is low relative to its peers.
At FYE 2012, WMH's debt was GBP350 million, which is equivalent to around 3.4x revenues and 46% of assets at cost; this is low compared to that of its peers. WMH aims to issue fixed-rate 30-year bonds in late 2012 and to use the proceeds for new development and refinancing. As a result of the bond, debt is anticipated to grow to around 4.0/4.5x revenue in 2013. WMH inherited some restrictions on its governance following its 2008 acquisition of Whitefriars and more recently in 2012 of Optima. With the bond restructuring, WMH will remove the majority of the restrictions with respect to Whitefriars
WHAT COULD CHANGE THE RATING -- UP / DOWN
Whilst unlikely in the near term given WMH's rising debt levels and existing governance constraints, one of the following could have positive rating implications: (1) a recurrent cash-interest coverage that structurally exceeds 2x and a social-housing-letting interest coverage above 1.5x; (2) debt levels that fall below 3.5x revenue; and (3) the lifting of existing governance constraints on legacy debt.
Negative pressure could be exerted on the rating by (1) cash-flow exposure beyond current projections, with a reliance on liquidity to cover interest costs; (2) higher-than-projected sales; (3) sustained increase in debt levels exceeding 4.5x 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.
With operations spread across the West Midlands, WMH is a large provider of social housing in England with around 25,000 homes under management.
The methodologies used in this rating 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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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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