Moody's Investors Service EMEA Limited ("Moody's") assigned an A1 issuer rating to Orbit Group Ltd (ORB). In addition, the rating agency has assigned an A1 debt rating to the proposed GBP250 million bond issuance of Orbit Capital Plc, ORB's borrowing vehicle.
Orbit Homes' (ORB) A1 rating assignment reflects 1) strong social housing margins, which has historically provided healthy interest cover; 2) moderate debt levels relative to its peers; 3) solid liquidity position with sizable unencumbered assets; and 4) strong geographic diversification. The rating also takes into account an increasing proportion of sales- related revenue and high levels of standalone swaps.
In addition our assessment that there is a strong likelihood that the UK government (Aa1, stable) would intervene in the event that ORB faces acute liquidity stress ORB is rated at the upper end of Moody's-rated English housing associations, whose ratings span from Aa3 to A3. ORB's relative position reflects its modest debt burden, which support good coverage levels.
- A diversified geographical footprint
- Historically strong social housing lettings margins and healthy interest
- Solid liquidity position backed by a sizable pool of unencumbered assets
- Moderate debt levels, rising to match Moody's rated peers
- Strong regulatory framework
- Government policy changes make operating environment more challenging
- Increasing exposure to for-sale receipts, which will become an increasingly important source of revenue
- Ambitious development plan
- Exposure to collateral posting as a result of large standalone-swap portfolio
On 8 July 2015, the UK government announced a number of measures that we view as credit negative for the sector. Notably a 1% annual reduction in social housing rents over the next four years. The rent reduction coupled with additional benefit reforms creates a more difficult operating environment for housing associations.
Projected financial metrics referenced in this report are from the post-budget revised business plan incorporating the impact of policy changes, specifically reductions to rents. ORB did not change its strategy materially following the rent decrease because the board felt the stress testing to the business plan indicated a robustness to revenue changes. However, the revised plan includes £14.7 million of saving per year by 2020 and a small decrease in the development programme from 2018-19. ORB has not included any Right-to-Buy (RtB) proceeds or Pay-to-Stay rent increases in their business plan. Economic assumptions were not altered in the revised plan as compared to the previous business plan approved by the board earlier in 2015.
The outlook on A1 rating is stable.
What Could Change the Rating - Up
A combination of the following could have positive rating implications: 1) a reduced risk profile as evidenced in lower exposure to sales; 2) sustained profitability in its social housing lettings business which would allow ORB to maintain social housing interest cover at a levels approximating 2x, despite growth interest cost given the additional borrowing; 3) reduced debt levels and 4) simplified treasury portfolio.
What Could Change the Rating - Down
Negative pressure could be exerted on the rating by one or a combination of following: 1) lower than expected sales revenue in relation to near term development plans and/or a continued growth in the development for the sales program; 2) social housing interest cover falling to levels below 1.5x on a sustained basis; and 3) an increase in borrowing that results in higher gearing than levels projected in the 2014 business plan (peaking at 45%).
Additionally, a weaker regulatory framework with 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.
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For further information, please refer to the rating action page here