Fitch moves four housing associations to negative outlook after UK sovereign downgrade

News01 Apr 2020Luke Cross

Fitch Ratings has moved four housing associations to a negative outlook following its decision to downgrade the UK sovereign rating.

Four HAs have seen their outlooks move to negative (picture: Getty)

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Fitch moves four housing associations to negative outlook after UK sovereign downgrade in response to #coronavirus crisis #ukhousing #socialhousingfinance

Fitch Ratings has moved four housing associations to a negative outlook following its decision to downgrade the UK sovereign rating #ukhousing #socialhousingfinance

A2Dominion, Great Places, Hyde and L&Q have all seen their outlook move downwards, but remain on A+ ratings.

Three other HAs rated by Fitch are unchanged, including Notting Hill Genesis, Places for People and Origin Housing, which remain on A stable.

Fitch said that the actions reflect the downgrade of the UK’s issuer rating to AA- last week, which it said “reflected a significant weakening of the UK’s public finances caused by the impact of the COVID-19 outbreak and a fiscal loosening stance that was instigated before the scale of the crisis became apparent”.

It added that the sovereign change also reflects the “deep near-term damage to the UK economy caused by the coronavirus outbreak and the lingering uncertainty regarding the post-Brexit UK-EU trade relationship”.

Fitch said it assesses registered providers under its revenue supported rating criteria.

A one-notch uplift is added to the standalone ratings, reflecting the application of the government-related entity criteria.

It said all four have standalone credit profiles in ‘A’ and are now capped at government minus one, while their outlooks reflect that on the sovereign.

It added: “Any further downgrade of the UK’s ratings would lead to a downgrade of these entities. Any weakening in the SCPs of the entities or any weakening in the assessment under the GRE Criteria could also lead to a downgrade.”

The agency also placed Transport for London on rating watch negative, while downgrading three Oxford colleges.

However, in a fuller update later in the day, Fitch said it does not expect any immediate negative rating actions due to the COVID-19 outbreak’s near-term impact on most of the sectors that it covers, including public transport, healthcare/NHS, higher education, social housing and local authorities.

But it said while its GREs have some rating headroom to withstand short-term economic disruption from the coronavirus outbreak, they "may be adversely affected if transmission rates soar and if the pandemic is prolonged".

Dean Tufts, executive director of finance and strategy at A2Dominion, said: “This change in outlook is not a reflection of our business or a change in our rating.

“Instead, it reflects our position close to the government’s current rating and its continued negative outlook. We remain among the highest-rated organisations by Fitch in this sector.”

Phil Elvy, executive director of finance at Great Places Housing Group, said: “Fitch’s decision to downgrade the UK sovereign rating is not unexpected and the fact that we are inextricably linked to the government in their rating methodology means that there would inevitably be a knock-on impact and therefore all four Fitch-rated registered providers have been placed on a negative outlook.

“We don’t believe this decision is a comment on Great Places and nothing should be read into the revised outlook that suggests that we are impacted more than any other registered provider by coronavirus.”

A spokesperson for L&Q said: “As per the government-related entity criteria, the rating will be capped at UK sovereign minus one and as such L&Q’s outlook being revised to ‘negative’ will reflect that of the UK sovereign rating which also has a ‘negative’ outlook.

“So in short, this is not a reflection on L&Q, but an outcome derived from the changed UK sovereign rating.”

Social housing outlook

Fitch said in a follow-up note that it does not see any immediate rating impact on registered providers of social housing, which also are less affected by the coronavirus than other Fitch-rated sectors.

“There may be an increase in arrears in the short term, as a consequence of tenants losing their jobs. However, the overall impact is lessened for registered providers because a significant proportion of rental income within social lettings is funded by benefit payments that will continue.

It added that registered providers may need to delay development programmes, affecting their cash flow, and postpone funding due to market uncertainty.

It added that isolation measures have already affected the UK property market, while the construction industry has said that without government action, building companies face widespread insolvencies, which Fitch said could affect registered providers.

"However, registered providers have some near-term flexibility and they will likely increase liquidity limits as an additional buffer.”

The move by Fitch does however raise the question of whether other ratings agencies – Moody’s, which rates the UK at Aa2 negative, and Standard & Poor’s (S&P), which rates it at AA stable – may also take action on the sovereign rating.

Moody’s and S&P cover the majority of the rated housing associations in the sector.

*This story was amended on 1/4/2020 to include additional sector overview from Fitch’s follow up note and comments.