Credit rating

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Moody's Credit Update: November 2018


On 7 November 2018 Moody’s published an update to its credit analysis of Optivo and confirmed there was no change to its A2 rating with a stable outlook.

Moody's commented:

"The credit profile of Optivo (A2 stable) reflects a business model supported by a core of low risk social housing letting, expected strong interest coverage, and operating margins at par with the median for the housing associations (HAs) we rate. The credit profile also takes into account the strong likelihood that the Government of United Kingdom (Aa2 stable) would intervene in the event that the association faces acute liquidity stress. Credit challenges include rising debt levels in the medium term and exposure to the cyclical housing market through shared ownership units and planned market sale properties."

Moody’s Credit Update: March 2018

On 1 March Moody’s affirmed Optivo’s A2 Issuer rating with a stable outlook, and assigned an A2 rating to Optivo’s proposed issuance of £250m senior secured bonds, also with a stable outlook, through finance vehicle Optivo Finance plc.

Moody’s commented:

Optivo’s A2 issuer rating is supported by robust profitability, sufficient interest coverage ratios, and a strong liquidity position. The rating also takes into account a moderate, but rising level of debt, an expected increase in development activity, and integration risk from the recent merger.”

Moody’s noted constraints on the rating as Optivo’s gearing ratio will rise from its current 41% to 50% by 2022. Also, whilst 60% of units developed will be for social rented or key worker accommodation, the remaining 40% will be for outright sale or shared ownership, exposing Optivo to the cyclical housing market.

However:

Optivo’s strong liquidity position mitigates the risk of cash shortfall which could stem from the development or sales programme. Projected immediately available liquidity for FY2018 is more than sufficient to cover the next two years of forecast net cash need.”

Moody’s issued a full update to Optivo’s credit analysis on 6 March.

Find out more about Moody’s Credit Opinion here.


Moody’s Credit Rating Update - September 2017

On 26 September 2017 Moody’s downgraded the 40 rated UK housing associations by one notch, with the outlook changed from negative to stable in each case. Optivo’s credit rating changed to A2 from A1.

This action followed the recent downgrade of the UK’s sovereign rating from Aa1 with negative outlook to Aa2 with stable outlook. The rationale for the downgrade is the negative impact of the decision to leave the EU Single Market and customs union on the country’s economic growth prospects. This effect impacts in turn on the UK’s credit profile and exacerbates pressure on fiscal consolidation.

The follow-on downgrade of housing association credit ratings reflects the close economic, financial and institutional linkages between the sovereign and sub-sovereign sectors.

Moody's Credit Update - June 2017

Moody’s assigned an A1 rating to Optivo following the merger of AmicusHorizon and Viridian Housing, withdrawing the A2 rating of AmicusHorizon Limited.

Optivo is now the parent company for AmicusHorizon Finance PLC, the issuing vehicle for the 2012 bond issuance, now also rated A1.

In March 2017 Moody’s placed the AmicusHorizon rating under review for upgrade ahead of the anticipated merger with Viridian Housing.
 

On issuing Optivo’s A1 rating Moody’s stated: 

Optivo’s rating is supported by debt metrics and interest coverage ratios aligned with A1 peers. Optivo benefits from Viridian’s historically low level of indebtedness, with the new entity expected to register 42% debt to assets at cost and 3.7x debt to revenue in FYE2018.

Optivo also benefits from a historic turnaround in AmicusHorizon’s profitability, with operating margins strengthening from 21% in FY2013 to 29% in FY2016, driving a material improvement in Social Housing Letting Interest Coverage (SHLIC) from 0.9x to 1.4x in the same period."


Moody’s expect these improvements to continue, demonstrated by forecasts of 27-29% operating margin, and SHLIC of 1.6x over the next two years.

Cash Flow Volatility Interest Cover (CVIC) is also expected to remain in-line with A1 peers, forecast at 1.5x in FY2018, rising to over 2.0x in the following year.


Moody’s also stated:

The rating action also takes into account the merger’s credit challenges, which include an increase in development plans in the medium term.

The increase in net capex is forecast to weaken the merged entity’s liquidity coverage metric to 1x as of FY2019. Mitigating this is the merged entity’s large proportion of unencumbered assets, equivalent to an estimated £1.1 billion in borrowing capacity.

This leaves ample borrowing headroom, even after accounting for the £275 million of additional debt that management plans to take on between FY2018 and FY2021. Moreover, Optivo’s treasury policies are clear and robust, which will likely ensure adequate liquidity levels are maintained
."
 

Moody’s summarise Optivo’s credit strengths as:

  • Strong proportion of low-risk social housing letting with improved profitability
  • Manageable debt levels, appropriate interest coverage ratios
  • Strong regulatory framework
and credit challenges as:
  • Larger development programme will increase exposure to sales risk and challenge the liquidity metric
  • Implementation and strategic risks surrounding merger
  • Government policy changes make operating environment more challenging for housing associations.