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Rating Action:

Moody's Downgrades Peabody Trust's Issuer Rating to A2 from A1; the outlook is Stable

28 Nov 2013

Downgrades GBP200 million Peabody Capital Bonds

NOTE: On December 5, 2013, the press release was revised as follows: “The weighting of all rating factors is described in the methodology used in this rating action, if applicable” as the last sentence in the Ratings Rationale section was removed. Revised release as follows:

London, 28 November 2013 -- Moody's Investors Service has today downgraded to A2 from A1 the issuer rating on Peabody Trust. The outlook is Stable. Concurrently we have downgraded the rating on Peabody Capital PLC's GBP200 million secured bonds.

RATINGS RATIONALE

Today's rating action reflects Peabody's Trust (PEA) expanded business activities and changed revenue mix, which evidences new risks given the introduction of outright sales, opening PEA to market volatility, and an upcoming merger with a weaker housing association, which we believe is a credit negative given the need for PEA to provide a subsidy over the near term and challenges to integrating two organizations. The rating also factors Peabody's historically strong and stable profile, strong management practices, London location and conservative business plan assumptions. In addition, ratings in the social housing sector benefit from (1) the strong regulatory framework governing English housing associations; (2) the revenue stability provided by government subsidies (housing benefit), although this may come under pressure from the introduction of universal credit; and (3) our assessment that there is a strong likelihood that the UK government (Aa1, stable) would intervene in the event that PEA faces acute liquidity stress.

The Peabody Capital PLC bond rating is based on PEA's issuer rating and as such has also been downgraded.

As per the application of Moody's Joint Default Analysis methodology for government-related issuers, PEA's baseline credit assessment (BCA) has been set at baa1. The final A2 rating reflects the uplift provided by Moody's assessment of a strong likelihood of support from the UK government.

PEA has historically had strong and stable finances, however, today's rating action factors the significant change in the business going forward. Importantly it reflects Peabody's significant development plan and the merger with Gallions. The long term business plan assumes no grant and as such shows a move into outright sales in order to cross-subsidize social housing development. Revenues from these sales, along with first tranche shared ownership sales, are projected to increase from less than GBP2 million in 2013 to nearly GBP90 million in 2015. Both types of sales are susceptible to market forces and as such add volatility to Peabody's otherwise stable revenue base. Our assessment is based on PEA's committed development plan.

Also factored into the downgrade is the impending merger with Gallions Housing Association, which is based in Thamesmead in the southeast of London. Gallions has had relatively weak operating results ( exacerbated by multiple years of land impairments), poor governance practices (as reflected in HCA's recent downgrade of its governance assessment to a level indicating non compliance) and its stock is in need of significant regeneration. PEA projections indicate demand for capital to fund stock regeneration as the business is currently not sufficiently cash generative to fund such improvements. However, PEA view this as an investment in the future as they judge this area well suited for redevelopment and an ideal location for market rent and sales given its increased accessibility to London from Crossrail development, expected to be complete in 2018. The redevelopment need, coupled with on-going development demands means that debt levels are projected to increase. Projections, based on committed development and regeneration, currently show gearing peaking at 50% in 2015 (from an average of 38% over the past five years), a level on the high side of the average among Moody's peers.

These new business endeavors are projected to have a negative impact on other key metrics, in addition to the above-cited gearing levels, in our methodology. Notably, social housing letting as a percent of revenues moves from the high 80s to a projected 62% in 2015, highlighting the increased risk as PEA moves out of core activities. Social housing letting interest cover, which has averaged 1.5x over the past five years is projected to fall below one times, reflecting a dependence on sales to cover debt service. While top line margins are maintained at historical levels (approximating 25%), the increased debt results in total margin eroding from approximately 20% to 5% over the next five years.

PEA has approximately 20,000 homes under management, which will grow to 27,000 with the addition of Gallions. Operations are all in London, where demand for social housing is very high.

WHAT COULD CHANGE THE RATING -- UP / DOWN

Whilst it is unlikely the rating would move up in the medium term, one or a combination of the following, could have positive rating implications: (1) a reduction in sales and/or decrease in capex; (2) a sustained track record of social housing letting above 1x; (3) successful integration of Gallions as reflected in stable financial operations at levels commensurate with past performance of PEA; (4) maintenance of debt levels below 50% gearing and 5x revenues and/or (5) an upgrade of the UK sovereign rating.

Negative pressure could be exerted on the rating by one or a combination of the following: (1) a track record of social housing letting interest cover below 1x; (2) failure to successfully integrate Gallions into the group as reflected in metrics below those projected in the business plan, a downgrade of governance by the HCA or the need for additional borrowing to subsidize operations or regeneration; (3) mismanagement of current sales program and/or (4) significantly more borrowing than projected resulting in debt levels consistently above 50% gearing and 5x revenues. In addition, a weaker regulatory framework, a dilution of the overall level of support from the UK government or a downgrade of the UK sovereign rating would also exert downward pressure on the rating.

The methodologies used in these ratings were English Housing Associations published in October 2013, 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Elizabeth Foy Bergman
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 M Rubinoff
MD - Sub-Sovereigns
Sub-Sovereign Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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 Downgrades Peabody Trust's Issuer Rating to A2 from A1; the outlook is Stable
No Related Data.
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