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The potential for Brexit with or without a deal causes uncertainty, and credit rating agencies do not like uncertainty.
According to Moody’s, the UK’s credit profile is vulnerable to a new government’s spending plans on top of the rising risk on a no-deal Brexit. Since housing association ratings are strongly linked to the sovereign rating, there is the potential risk that any downgrading of the sovereign rating could have a knock-on effect on the credit ratings of housing associations. Indeed, credit rating agency Standard & Poor’s (S&P) announced on 15 October that a “No-deal Brexit would spell ratings pressure for many UK housing associations.”.
A credit rating downgrade of a housing association could mean at least three issues:
- It may be an event of default in a funding agreement (if there is a default linked to ratings);
- It may affect the ability of the housing association in raising funds by way of private placement or public bond;
- It may affect the marketability of bonds and notes already issued.
If ratings fall into the lower investment grades or below, as outlined in the recent Sector Risk Profile issued by the Regulator of Social Housing, this could impact on funding costs as well as the pool of investors in social housing bonds/private placements.
Public Works Loan Board (PWLB)
On 9 October 2019, HM Treasury raised the interest rates that local authorities can borrow for capital investment from the PWLB. This lending is offered at a fixed margin above the Government’s cost of borrowing, as measured by gilt yields. The Treasury raised the margin over gilts by 100bps (one percentage point). While this directly affects local authorities, it could also impact housing associations in the following ways:
- If the housing association has an existing loan from a local authority (or is considering borrowing from a local authority) where the interest rate is based on a reference rate that is linked to PWLB, then this may mean the interest rate payable will increase.
- If the housing association is in (or is considering entering into) a property development joint venture, and the relevant local authority is investing money into the joint venture that originates from a loan from PWLB, then it will become more expensive for the local authority, which may affect the financial viability of the project.
With the potential for an economic downturn, a fall (or further fall) in the price of outright sale units and a slowdown in sales of outright sale units comes the risk that there is an impairment of the value of such development investments, including where the housing association has invested in outright sale development joint ventures. Not only can this impairment affect the profitability of the housing association, it can also adversely affect the ability of the housing association to comply with the financial covenants in its funding agreements. Housing associations should check their existing financial covenants to see if they exclude impairment charges. If the housing association is negotiating funding agreements, then they should look to exclude any impairment charges where possible.
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