London, 13 November 2012 -- Moody's Investors Service has today assigned an A1 issuer rating to English housing association, B3 Living Limited (B3L), formerly Broxbourne Housing Association. The outlook on the rating is negative.
Today's rating assignment reflects the strong, but declining cash flows that B3L generates from a robust foundation of low-risk social-housing letting.
The rating also incorporates Moody's assessment of a strong regulatory framework for English housing associations, and the high proportion of B3L's revenues derived from government subsidies, which adds to its revenue stability.
However, the rating is constrained by B3L's weak bottom-line margin, a growing exposure to sales, rising debt levels, and the legacy of Large Scale Voluntary Transfer (LVST) restrictions on its operations and financial management, which it plans to lift as part of a planned bond refinancing.
As per the application of Moody's Joint Default Analysis methodology for government-related issuers, B3L's baseline credit assessment (BCA) has been set at baa3. The final A1 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 B3L experiencing acute liquidity stress.
Moody's notes that low-risk social-housing letting generated almost the entirety of B3L's revenue in 2012, contributing to a recurrent cash interest coverage at 3.4x in 2012, which is amongst the strongest in Moody's rated peer. Going forward, as interest costs rise to support capital investments and a planned refinancing, the recurrent cash interest coverage is expected to weaken to around 1.5x and the bottom-line margin to report a deficit of -1% in 2013, peaking at -6% in 2016. The latter demonstrates B3L's volatile and weak performances, which amongst other things, are a function of its small size.
B3L anticipates debt to rise up to 5.4x revenues in FY2013, before falling to 4.0x in 2014 as planned shared-ownership sales, peaking at 19% of revenues in 2014, boost revenue.
B3L plans to issue a secured fixed-rate bullet bond of GBP68 million in FY2013 to refinance a share of its debt and to fully fund its development programme. Following the bond restructuring, management will gain financial autonomy by lifting historical LSVT restrictions in operations, finances and development.
The negative outlook mirrors the outlook on the UK's Aaa sovereign ratings, given B3L's strong financial, operational and economic linkages with the central government.
What Could Change the Rating -- Up / Down
Whilst unlikely in the near term given the negative sector outlook and the increase in B3L's debt levels, one of the following could have positive rating implications: (i) its operating margin improving to levels above 30% and ongoing bottom-line surpluses; (ii) a social-housing-letting interest coverage structurally above 1x; and (iii) debt falling below 4.0x revenue.
Negative pressure could be exerted on the rating by (i) an increase in sales in excess of current plans or weaker sales profits; (ii) a deterioration in its recurrent cash-interest coverage below 1.5x and a social housing letting interest coverage below 0.5x; and (iii) debt levels that remain structurally above 4.5x revenue. In addition, 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.
The issuer rating is based on B3L's central scenario, which includes the sale of GBP68 million bonds in 2012. Were the bond sale not to take place due to market conditions, the rating would be reviewed to assess the long-term implication of likely changes in B3L's financial strategy.
With operations concentrated in one local authority in South Hertfordshire, north of London, B3L is a recently formed Large Scale Voluntary Transfer social housing provider with around 4,500 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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