Actions follow weakening of sovereign credit profile
London, 25 February 2013 -- Moody's Investors Service has today taken various rating actions on the
following UK sub-sovereign entities: (1) Local Authorities
and Transport for London; (2) English Housing Associations;
and (3) English Universities. The actions follow the recent downgrade
of the UK's government bond rating to Aa1 with a stable outlook.
For more details, please refer to Moody's press release: http://www.moodys.com/research/Moodys-downgrades-UKs-government-bond-rating-to-Aa1-from-Aaa--PR_266844
These rating actions have resulted in a one-notch downgrade for
5 regional and local governments (RLGs, in this case Local Authorities),
and the following government-related issuers (GRIs): Transport
for London, 26 English Housing Associations and Keele University
and De Montfort University.
Further to these downgrades, Moody's has assigned stable outlooks
to the ratings of the 5 Local Authorities and Transport for London,
while the ratings for Keele University and De Montfort University retain
negative outlooks, and the ratings for all housing associations
have been placed on review for further downgrade to reflect ongoing developments
in the sector.
Moody's has maintained the Baa2 rating of Assettrust Housing Association
and the A1 rating of Genesis Housing Association, but has placed
both on review for downgrade. The University of Cambridge's Aaa
rating with a stable outlook was affirmed.
Please click on the following link: http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_150521
to access the List of Affected Credit Ratings, which is an integral
part of this Press Release and identifies each affected issuer.
For full details of analytical considerations leading to this action,
please refer to Moody's dedicated Special Comment entitled "Key
Drivers of Moody's Actions on UK Sub-Sovereign Ratings".
http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_150518.
RATINGS RATIONALE
OVERALL RATIONALE FOR DOWNGRADE OF UK SUB-SOVEREIGNS
The downgrade of the UK's sovereign rating has direct implications
for sub-sovereign entities given the economic, financial
and institutional linkages between the sovereign and Local Authorities,
Transport for London, English Housing Associations and English Universities.
-- ECONOMIC AND FINANCIAL: A downturn in the economic
outlook in the UK has direct implications for UK sub-sovereign
budgets through (1) slowing or declining transfers received from the central
government, which make up a significant share of their revenue;
(2) further potential austerity measures included in the government's
next Comprehensive Spending Review (CSR).
--INSTITUTIONAL: The UK national government retains
a high degree of control over the sub-sovereign sector via legislation
and the different regulatory frameworks in place.
In addition, Moody's has reassessed the likelihood of extraordinary
support coming from the sovereign, due to sector-specific
developments in the English University and the English Housing Associations
sectors.
Group-specific rationales for (1) Local Authorities and Transport
for London; (2) English Housing Associations; and (3) English
Universities are provided below.
1.) RATIONALE FOR DOWNGRADES OF LOCAL AUTHORITIES AND TRANSPORT
FOR LONDON
Moody's decision to downgrade by one notch the ratings of five Local
Authorities (LAs) and that of Transport for London (TfL) was driven by
the marginal increase of the systemic risk for these sectors, following
the downgrade of the sovereign to Aa1 from Aaa. This largely reflects
the close institutional, operational and financial linkages between
the central government and LAs and TfL. These ties are further
detailed in Moody's Special Comment "Key Drivers of Moody's
Actions on UK Sub-Sovereign Ratings".
-- WHAT COULD MOVE THE RATINGS UP/DOWN
An improvement in the UK government's credit profile, as reflected
by an upgrade of the sovereign rating, could lead to an upgrade
for the five rated LAs and TfL. A further weakening of the UK government's
credit profile as reflected by a further downgrade of the sovereign rating
would likely translate into a downgrade of the UK sub-sovereign
issuers' ratings. At the same time, significant reductions
in government expenditure following the upcoming CSR, leading to
widening financing deficits and substantial increase in debt metrics,
or a weakening of the relationship with the central government,
including its funding agency the Public Works Loan Board (PWLB),
would all result in negative pressure on the credit profiles of Moody's-rated
LAs and TfL.
2.) RATINGS RATIONALE FOR ENGLISH HOUSING ASSOCIATIONS
Moody's decision to downgrade the ratings of 26 of the English Housing
Associations (HAs) by one notch was driven by a reassessment of the potential
provision of extraordinary support from the regulator, and ultimately
the government, should any HA experience acute liquidity stress.
This largely reflects a somewhat weaker regulatory framework, particularly
in light of an evolving situation concerning an HA in financial distress
(for further information, please see Moody's Special Comment
"Key Drivers of Moody's Actions on UK Sub-Sovereign Ratings").
All ratings in the sector have been placed on review for further downgrade
as Moody's continues to refine its view on the likelihood of extraordinary
support.
Moody's decision to maintain the Baa2 rating of Assettrust Housing
Association was driven by this entity's reduced dependence on government
support. However, Moody's has placed Assettrust's
rating on review for downgrade, in line with the rest of the sector.
Moody's decision to maintain the A1 issuer rating of Genesis Housing
Association (GEN) reflects the rating agency's assessment that GEN's
standalone credit has strengthened, due to (1) its improving cash
flows, with plans to eliminate its historical reliance on sales
to cover interest costs; (2) a reduced risk from hedging; (3)
improved liquidity; and (4) stronger controls and budget planning.
In addition, Moody's has placed GEN's rating on review
for downgrade, in line with the rest of the sector.
-- WHAT COULD MOVE THE RATINGS UP/DOWN
An improvement in the UK government's credit profile, as reflected
by an upgrade of the sovereign, would exert upward rating pressure
on the ratings of HAs. Conversely, a further weakening of
the UK government's credit profile, as reflected by a further downgrade
of the sovereign rating, would likely translate into a downgrade
of HAs. In addition, unmanageable reductions in welfare expenditure
arising from the upcoming CSR, or increased implementation risks
associated with the introduction of universal credit would result in negative
pressure on the credit profile.
Additionally, a downward revision of Moody's assessment of
the likelihood of timely government support being provided to an HA experiencing
acute liquidity stress, would also exert downward pressure on the
ratings.
During the review period, Moody's will assess the likelihood
of extraordinary support that might be available for English HAs in case
of need. If Moody's concludes that there are support inefficiencies,
the rating agency would likely further lower its assessment of liquidity
support for the sector and hence limit the uplift currently provided by
such support; this could potentially prompt Moody's to downgrade
some entities by multiple notches.
3.) RATINGS RATIONALE FOR ENGLISH UNIVERSITIES
Moody's decision to downgrade the ratings of Keele University and De Montfort
University was driven by a reassessment of the levels of access to extraordinary
support. Although the sector's regulatory framework and oversight
remain strong, the regulator has marginally weaker formal powers
than in other sectors. In addition, Moody's maintained
the negative outlook on the ratings of these two entities, reflecting
the ongoing uncertainty in the sector with respect to the full impact
of the funding reform and strength of domestic and international student
numbers.
Moody's decision to affirm the University of Cambridge's Aaa rating
with a stable outlook reflects the institution's extraordinarily strong
market position, higher revenue diversification, its significant
liquid assets, strong governance structure and low debt levels.
Given the University of Cambridge's strong credit profile,
the stable outlook on the Aaa rating reflects Moody's assessment
that this entity is not exposed to the risks from increasing competition
in the higher education sector to the same degree as its rated peers.
--WHAT COULD MOVE THE RATINGS UP/DOWN
An improvement in the UK government's credit profile, as reflected
by an upgrade of the sovereign, would exert upward pressure on the
ratings of Keele University and De Montfort University. In addition,
increased certainty with respect to future student numbers, both
domestic and international, coupled with a solid and stable financial
performance going forward, could stabilise the outlooks for these
two universities.
A further weakening of the UK government's credit profile, as reflected
by a further downgrade of the sovereign rating, would likely translate
into a downgrade of Keele University and De Montfort University.
In addition, reductions in government expenditure on higher education
following the next CSR, a further dilution in regulatory support,
or a worsening in student numbers would all result in negative pressure
being exerted on the universities' credit profiles.
While considered unlikely for the University of Cambridge, a sustained
deterioration in the value of its endowment funds or significant increase
in borrowing outpacing revenue and resource growth could exert downward
pressure on the rating.
PRINCIPAL METHODOLOGIES
The principal methodology used in rating Local Authorities was Regional
and Local Governments published in January 2013.
The principal methodology used in rating Transport for London was Government-Related
Issuers: Methodology Update published in July 2010.
The principal methodologies used in rating English Housing Associations
were English Housing Associations published in September 2010, and
Government-Related Issuers: Methodology Update published
in July 2010.
The principal methodologies used in rating English Universities were Methodology
for Rating Public Universities published in August 2007, and Government-Related
Issuers: Methodology Update published in July 2010. Please
see the Credit Policy page on www.moodys.com for a copy
of these methodologies.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The below contact information is provided for information purposes only.
Please see the ratings tab of the issuer page at www.moodys.com,
for each of the ratings covered, Moody's disclosures on the
lead analyst and the Moody's legal entity that has issued the ratings.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Roshana Arasaratnam
Vice President - Senior Analyst
Sub-Sovereign Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
David Rubinoff
MD - Sub-Sovereigns
Sub-Sovereign Group
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's takes action on UK sub-sovereigns
