Jan 16 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Genesis Housing Association Ltd's (Genesis) Long-term foreign and local currency IDRs at 'AA-' and its Short-term foreign currency IDR at 'F1+'. The Outlooks on the Long-term IDRs are Negative. Fitch has also affirmed GenFinance II PLC's (GFII) GBP250m secured bonds at Long-term local currency 'AA-'. GFII is a wholly-owned subsidiary of Genesis.
KEY RATING DRIVERS
Genesis benefits from social housing grants from the central government as well as from government subsidies through housing benefits. The ratings also factor in on-going supervision from the regulator, the Homes and Communities Agency (HCA), continuing cash flow from rented properties, and high demand for social housing in the London areas where it operates.
Fitch applies its public-sector entities criteria to rating registered providers (RP), using a bottom-up approach. We first assess the RP's credit profile and then apply a two-notch uplift to reflect the strong quality of the RP's cash flow through government funding and the control and tight monitoring of RPs through HCA..However, the sector has recently seen an increase in its exposure to business risks, following an expansion into non-social housing and increasing development activities. While public funding and regulatory oversight are still strong credit factors supporting the ratings, this is not as robust as it once was. The social housing sector in England was consequently placed on Negative Outlook in May 2013.
Due to welfare reforms and the universal credit system being rolled out nationally (expected to be completed by October 2017) rental flows are changing. RPs that have traditionally received a high level of turnover from social housing have seen their revenue streams become more volatile. Fitch is still assessing the impact on arrears of the direct payment of housing benefits to tenants and changes to the regulatory role of the HCA.
Genesis forecasts increased turnover and continued surpluses from social housing activities over the next three years. Total group surpluses are also forecast to increase to just below EUR60m in FY16, from just over EUR30m in FY14. Although the bulk of income stems from core social housing activities, Genesis is involved in significant development schemes. To fund its development programme, debt has increased by 28% over the past six years but is forecast to increase only marginally to GBP1.5bn in FY15 from GBP1.4bn in FY13. The debt repayment profile is long and smooth and 93% of debt is due for repayment only after five years.
Genfinance II PLC's bonds are rated at the same level as Genesis's IDRs as they constitute direct, unsubordinated, unconditional and secured obligations of the issuer and rank pari passu without preference or priority amongst themselves.
The Negative Outlook reflects the following risk factors that may, individually or collectively, lead to a downgrade:
-The current two-notch uplift for government could be narrowed to one notch if Fitch considers that the changes to the sector's regulation would result in weaker oversight
-The standalone credit profile of Genesis may be downgraded if the direct payment of housing benefit to tenants results in a significant increase in arrears
-Increased volatility of operating revenue as a result of higher exposure to development activities and a significant increase in gearing