RPT-Fitch Assigns A2Dominion Housing Group Limited 'AA-' Rating; Outlook Negative
Sept 19 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned A2Dominion Housing Group Limited (A2D) Long-term local and foreign currency ratings of 'AA-' and a Short-term local currency rating of 'F1+'. The Outlooks on the Long-term ratings are Negative.
Fitch has also assigned A2D Funding plc.'s proposed unsecured bonds an expected Long-term local currency rating of 'AA- (EXP)'. The rating is aligned with A2D's rating.
The final rating is contingent on the receipt of final documentation conforming to information already received.
A2D's ratings reflect the continuing demand for social housing in the south of England where the group operates as well as continued cash flow from rented properties. The ratings also reflect the secured cash flow from public funds and the control and regulation provided through the Homes and Communities Agency (HCA).
KEY RATING DRIVERS
The Negative Outlook reflects the outlook for the English social housing sector (see 'Fitch Revises Two English Social Housing Associations' Outlooks to Negative' dated 30 May 2013 at www.fitchratings.com). The sector is facing more exposure to business risks with expansion into non-social housing activity and increasing development activities, and although public funding and regulatory oversight are strong credit factors supporting the ratings, in Fitch's view, they are not as robust as they once were.
Changes to Welfare Reform
A2D receives government subsidies through housing benefit and social housing grants. The key areas affecting A2D in terms of changes to welfare reform are direct payment, lower benefits and benefit caps. A working group was set up to identify areas of risk and quantify potential bad debts. In terms of direct payment, currently only 38% of all A2D's tenants receive housing benefit to pay for either part or all of their rent and only 11% of all tenants have all their rent paid for by housing benefit. This will help mitigate the effects on arrears currently at 4.04%.
Demand is still strong and waiting lists are still long in the 82 local authorities where the group has housing units. Strong demand is also reflected in 124 applications on average per void for choice based lettings. A2D reports good performance on void loss and re-letting times, which are good identifiers of demand.
A2D has recorded net group annual surpluses for the past five years and the group's business plan forecasts surpluses. Operating margin is expected to increase to 29% in FY18 from 21% in FY14. The mix of A2D's turnover is forecast to change with a rise in non-social housing turnover which contributes 30% of the overall turnover in FY14 and increases to 53% in FY17.
A2D has currently just over GBP1,100m of debt, which is forecast to increase to just under GBP1,400m by FY16. Key financial covenants are interest cover and gearing which are met at YE13 and are forecast to be met in the business plan.
The group aims to issue an unsecured bond. The issuer will have a guarantee from A2D. The sole purpose of the issuer will be to issue bonds and on lend the proceeds to subsidiaries.
The rating of the unsecured bonds reflects the ample security cover and legal responsibility of the guarantor for the full and timely repayment of the bonds and interest payments through the loan agreement and guarantee.
A downgrade could result from material increase in rent arrears resulting from the changes in housing benefit. A downgrade could also result from a further loosening of regulation, a significant increase on non-social housing activities leading to increased volatility in operating revenue and a significant increase in gearing.
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