Rating agency changes outlook to ‘stable’ due to expectations of falling inflation and providers’ caution on development spend – but downgrades for Riverside and Greensquare Accord

Moody’s has raised its outlook for 33 housing associations from ‘negative’ to ‘stable’ amid confidence about falling inflation.

The action means the credit rating agency now considers there is a lower likelihood of a rating change for the associations over the medium term, whereas previously it thought rating downgrades were more likely.

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Moody’s noted that inflationary pressures, high expenditure requirements on existing stock and this year’s 7% annual rent increase cap have “weighed on operating performance”.

But it said: “With inflation projected to ease, housing associations are expected to see revenue growth exceed cost growth, supporting their operating margins and interest coverage ratios over the medium term.”

Moody’s also said that the decision reflects associations’ mitigations

It said: “Many have scaled back their development programmes, thereby limiting their exposure to escalating construction costs and moderating the pace of debt growth, as much of their capital spending is financed through debt.

“This containment of debt growth also aids in reducing their susceptibility to rising interest rates.”

However, Moody’s lowered the credit rating for Riverside from A3 to Baa1 meaning it is now considered a moderate credit risk, and lowered its baseline credit assessment, which gauges standalone intrinsic strength from Baa3 to Baa2. Its outlook however remains stable.

Moody’s said the downgrade “reflects Riverside’s weaker operating performance relative to peers, with a poorly performing care business and higher fire building and safety expenditures inherited from a merger [with One Housing] in 2021.”

A Riverside spokesperson said: “As a result of the merger,  we have already seen real benefits to the services and support we are able to offer to our customers. We have committed to invest £1billion in improving and repairing our homes over the next five years, with a focus on building and fire safety, warmer homes and regeneration.”

Moody’s maintained negative outlooks for six associations: Greensquare Accord, Hightown Housing Association, Jigsaw Homes, L&Q, Moat and Stonewater.

Greensquare Accord, L&Q and Stonewater have all “shown weaker operating performance, marked by lower operating margins or interest coverage metrics compared to their peers”, said Moody’s.

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It said Hightown, Jigsaw, Moat and Stonewater have significant capital spending needs to “ambitious development programmes” and they could see interest coverage rations weaken.

It said L&Q has high exposure to market sales. While Hightown and L&Q have high exposure to variable interest rates.

In addition, Standard & Poors maintained its negative outlook for Stonewater. It said: “The negative outlook reflects our view that elevated investments in new and existing assets, combined with persistently high inflation, could weaken Stonewater’s financial performance and elevate its debt burden more than we currently expect.”

Greensquare Accord had its long term issue rating downgraded by Fitch one notch from ‘A’ to ‘A-‘ meaning it is considered more risky, but still has a low default risk.

The ratings agency said described the 25,000-home association’s performance as “adequate, but deteriorating due to challenges in recent years, internal merger-related costs, and those expected in the near term, caused by external macroeconomic pressures.”