London, 26 September 2017 -- Moody's Public Sector Europe (MPSE) has today taken rating actions on
55 UK sub-sovereign entities (and associated 34 SPVs) covering
the following sectors: (1) local authorities; (2) Transport
for London; (3) universities; (4) housing associations;
and (5) PRS Finance plc. The actions follow the recent downgrade
of the UK's government bond rating to Aa2 with a stable outlook
from Aa1 with a negative outlook: http://www.moodys.com/viewresearchdoc.aspx?docid=PR_372649.
Moody's has downgraded the ratings of 54 entities and has affirmed the
Aaa rating with a stable outlook for the University of Cambridge.
The outlooks for seven universities and two local authorities are retained
as negative, and the outlooks for housing associations and Transport
for London are changed to stable from negative. A full list of
affected Credit Ratings can be seen via the following link:
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_197362
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and identifies each affected issuer.
RATINGS RATIONALE
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_197362
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and provides, for each of the credit
ratings covered, Moody's disclosures on the following items:
* Principal Methodologies
OVERALL RATIONALE FOR DOWNGRADE OF 54 UK SUB-SOVEREIGNS
The downgrade of the ratings of 54 UK sub-sovereign issuers and
associated SPVs reflects the close economic, financial and institutional
linkages between the sovereign and sub-sovereign sectors.
The rating for the University of Cambridge has been affirmed due to its
exceptional market position, diversified revenue sources,
and low debt relative to peers.
Moody's believes that the UK government's decision to leave the
EU Single Market and customs union as of 29 March 2019 will be negative
for the country's medium-term economic growth prospects.
Aside from the direct impact on the UK's credit profile, the
loss of economic strength will further exacerbate the evident pressures
on fiscal consolidation. The UK's weaker economic outlook
has direct implications for UK sub-sovereign budgets through potential
slowing or declining central government transfers, which make up
a significant share of their revenue.
The UK national government retains a high degree of control over the sub-sovereign
sector via legislation and the different regulatory frameworks in place.
The ability of central government to provide timely and forward-looking
policy direction for public sector entities may be compromised as the
sovereign's institutional capacity is dominated by dealing with the implications
of the UK's departure from the EU.
Sector-specific rationales for (1) local authorities; (2)
Transport for London; (3) universities; (4) housing associations;
and (5) PRS Finance plc are provided below.
1) RATIONALE FOR ONE NOTCH DOWNGRADE ON LOCAL AUTHORITIES
The one notch downgrade reflects the close institutional links between
the local authority sector and the sovereign, as well as the sector's
continued high dependence on government transfers. Should there
be further pressure on UK government finances, Moody's expects
that these would continue to be passed on to local authorities.
Furthermore, slower economic growth would impose downward pressure
on business rates, which are now partially retained by local authorities,
as well as own-source revenues.
RATIONALE FOR TWO NOTCH DOWNGRADE ON WARRINGTON BOROUGH COUNCIL
The two notch downgrade of Warrington Borough Council (Warrington) from
Aa2 to A1 reflects (1) the pressures discussed above for all UK local
authorities, and (2) the relative position of Warrington compared
to other rated local authorities in terms of risk appetite and projected
increased debt burden. Warrington's capital investment programme
demonstrates a higher risk appetite relative to peers. In addition
to traditional town centre infrastructure improvements, the programme
includes investing in a new "challenger" bank, launching
a Housing Company, and on-lending to housing associations,
introducing riskier elements to the local authority's credit profile.
Warrington plans to fund this capital programme mainly through debt,
which would lead to a projected quadrupling of debt to revenues over the
next three years, from 103% in 2016 to a forecast 436%
in 2019.
RATIONALE FOR CHANGING OUTLOOK TO STABLE FROM NEGATIVE ON CORNWALL COUNCIL,
ABERDEEN CITY COUNCIL AND GUILDFORD BOROUGH COUNCIL
The change in outlooks for Cornwall Council (Cornwall), Aberdeen
City Council (Aberdeen) and Guildford Borough Council (Guildford) to stable
reflects the stable outlook on the UK sovereign. Furthermore,
while funding uncertainties remain, the stable outlook is supported
by the proven abilities of these local authorities to absorb the funding
cuts imposed thus far by the central government.
RATIONALE FOR RETAINING NEGATIVE OUTLOOK ON LANCASHIRE COUNTY COUNCIL
AND WARRINGTON BOROUGH COUNCIL
The negative outlook for Lancashire County Council (Lancashire) reflects
uncertainties regarding the local authority's savings plan.
A plan to prevent the council from running out of non-earmarked
reserves within the next two years has not yet been agreed. The
negative outlook for Warrington reflects increasing contingent liabilities
linked to the capital and treasury investment programme.
WHAT COULD MOVE THE RATINGS UP/DOWN
Upward pressure would be exerted from a significant strengthening in financial
performance and a material decline in debt. Given that Cornwall
and Guildford are rated on a par with the UK sovereign rating, an
upgrade of the sovereign rating would be a necessary, but not sufficient,
pre-condition to an upgrade of Cornwall and Guildford. For
Lancashire, given the negative outlook, a rating upgrade is
unlikely, however a credible plan to return the local authority
to fiscal sustainability would support the return of the rating outlook
to stable. For Warrington, given the negative outlook,
a rating upgrade is unlikely, however a material increase in reserves
or a limitation of the scope of contingent liabilities would exert stabilising
pressure on the outlook.
Downward pressure would arise from any further deterioration of the creditworthiness
of the UK sovereign, or demonstrated further weakening of the links
between the central and local governments, a lack of credible budgeting
to prevent depletion of local government reserves and/or a significant
worsening of debt metrics, either due to ambitious capital programmes
or repeated large operating deficits. For Warrington, downward
pressure could also arise from the materialisation of contingent liabilities,
depletion of reserves, or a failure of expected income from investments
to accrue.
2) RATIONALE FOR THE DOWNGRADE AND STABLE OUTLOOK ON TRANSPORT FOR LONDON
(TfL)
The downgrade of the rating of Transport for London (TfL) to Aa3 from
Aa2 reflects the close institutional, operational and financial
linkages with the sovereign. A significant proportion of TfL's
income comes through locally raised business rates paid by the Greater
London Authority. These transfers may be negatively impacted by
a weakening economy.
The stable outlook on TfL's rating reflects the stable outlook on
the UK sovereign and Moody's view that TfL will be able to absorb
potential negative implications of Brexit including diminishing funding
from the EU and slower growth in ridership reflecting slower growth in
London's population. TfL's P-1 short term rating
was affirmed.
WHAT COULD MOVE THE RATINGS UP/DOWN
Upward pressure on the rating could result from the following: a
significant and sustained improvement in TfL's financial position,
including outperformance in fare revenues, and/or a substantial
decrease in its debt burden resulting in lower interest payments.
Furthermore, materially improved revenue and spending flexibility
or an upgrade of the UK sovereign rating could also put upward pressure
on the rating.
Downward pressure could result from TfL's underperformance in meeting
operational or financial goals, specifically if fare revenue growth
is materially slower than projected, new revenue sources fail to
contribute to the revenue gap or planned expenditure savings do not materialise.
Further, if the UK government were to signal a clear dilution of
its support for TfL's capital plan or the UK sovereign rating were to
be downgraded, this would also put downward pressure on the rating
given the strong linkages in funding and support from the sovereign.
3) RATIONALE FOR THE DOWNGRADE AND NEGATIVE OUTLOOKS ON UNIVERSITIES
The downgrade of final ratings and the maintained negative outlooks on
seven rated UK universities reflect the close institutional and financial
linkages with the UK as well as Brexit-specific sector risks.
Central government funding, though in decline in the last five years,
still accounts for a significant proportion of income for UK universities.
Lower economic growth could put pressure on public finances, resulting
in lower transfers to universities for both teaching and research which
could impact competitiveness.
In addition to potential knock-on effects of a weaker UK economy
and stagnant domestic demand, rated universities are likely to be
negatively impacted by Brexit-specific risks, including:
fewer international students in the UK, loss of European research
funding, and fewer EU students and staff. Of these,
the implications of fewer international students would have the most significant
credit impact. The majority of rated universities have increased
their borrowing to fund capital projects in the last couple of years,
with an expectation that growth in tuition fees from both domestic and
international students would offset increased interest expense.
Given the current climate of weakened student demand and increased competition,
Moody's expectation is that some universities will be unable to
realise their revenue targets.
The loss of EU research funding, students and staff will have less
of a direct financial impact, but may erode competitiveness and
market position in an increasingly competitive and global market.
RATIONALE FOR AFFIRMING THE UNIVERSITY OF CAMBRIDGE'S Aaa RATING AND STABLE
OUTLOOK
The affirmation of the University of Cambridge's Aaa rating with
a stable outlook reflects its extraordinary market position as an established
global leader in the higher education sector, its superior financial
resilience relative to peers, and proactive response to mitigating
Brexit-specific risks. Moreover, Cambridge does not
seek to materially increase its current number of students (c20,000)
so its forecasted financial position is not as dependent on growing its
student numbers for domestic or international students, as is the
case for other rated universities.
Cambridge is less susceptible to adverse movements in government support
than other universities due to its diverse revenues, substantial
endowment, and low level of debt. The maximum single revenue
contribution for Cambridge is 26% compared to a median of 46%
for UK-rated universities. Moreover, Cambridge is
less indebted than its peers, with debt to revenues of 21%
compared to a median of 45% for rated universities. Its
cash and investments stood at a very strong GBP3.3 billion at FYE2016.
Finally, Cambridge can raise funds more easily than its peers due
to its exceptional reputation, government relationships, and
alumni.
Additionally, Cambridge is undertaking a proactive response to Brexit
risks. The university is actively seeking research funding outside
of EU sources, including plans to increase funds from research councils,
industry, trusts and foundations, in addition to plans to
increase engagement with the corporate sector.
WHAT COULD MOVE THE RATINGS UP/DOWN FOR RATED UNIVERSITIES, EXCLUDING
THE UNIVERSITY OF CAMBRIDGE
Whilst unlikely in the near-term, an improvement in the UK
government's credit profile, as reflected by an upgrade of
the sovereign, would exert upward pressure on universities'
ratings. The ratings could also face upward pressure if they were
to significantly improve their performance and market positions in the
face of increased competition in the sector through improving enrolment
trends, substantial increases in research funding, or growing
endowments.
A further weakening of the UK government's credit profile,
as reflected by a downgrade of the sovereign rating, would likely
translate into a downgrade of the universities' ratings.
In addition, an inability to realise targets for international or
domestic student growth, reductions in government funding for the
sector, a weaker regulatory framework or an adverse change in assumption
for government support would all result in negative pressure being exerted
on the universities' credit profiles.
WHAT COULD MOVE THE RATING DOWN FOR UNIVERSITY OF CAMBRIDGE
Whilst considered unlikely in the near-term, a sustained
deterioration in the value of its endowment funds, a weakening in
its ability to attract research funding or top students and staff,
or a significant increase in borrowing that outpaces revenue growth could
exert downward pressure on the rating.
4) RATIONALE FOR THE DOWNGRADE AND STABLE OUTLOOKS ON HOUSING ASSOCIATIONS
The one notch downgrade of ratings for the 40 UK housing associations
(HAs) and the associated 34 SPVs (see list of affected entities) reflects
the close institutional, operational and financial linkages between
HAs and the UK sovereign.
The stable outlooks on 40 HAs and associated 34 SPVs reflect the stable
outlook on the sovereign rating. Moody's expects the median
operating margin to remain stable near 30% over the next two years,
and median social housing letting interest cover to remain around 1.4x.
HAs have adapted well to a challenging policy environment, which
is unlikely to undergo further material change in the medium-term.
Additionally, oversight in the sector remains strong, with
the regulator (the Homes and Communities Agency) effectively monitoring
risk through quarterly reporting and in-depth assessments.
In addition, it has the ability to intervene in the management of
a HA in financial distress.
The Baseline Credit Assessments (BCAs) of the 40 HAs are maintained (with
the exception of Notting Hill Housing Group) as sector-wide risks
and issuer specific risks are reflected in the idiosyncratic assessments
of our rated HA entities. Declining government transfers and capital
funding have led to increases in market sales exposure in the sector,
however the level of exposure varied from 0% - 42%
in FY2016 across our rated HAs and is incorporated in their given idiosyncratic
BCA rating.
Places for People Homes Limited and Places for People Capital Markets
PLC's short-term ratings were downgraded to (P)P-2 from
(P)P-1. The methodology used to assess Places for People
Homes Limited's BACKED Senior Secured debt was Rating Transactions
Based on the Credit Substitution Approach: Letter of Credit-backed,
Insured and Guaranteed Debts, published in May 2017, which
differed from the principal methodologies used to assess the issuer (Places
for People Homes Limited). The relevant methodologies used for
the affected Credit Ratings are listed in the FROM TO list, which
can be accessed by the link provided.
RATIONALE FOR LOWERING BCA AND DOWNGRADING FINAL RATING BY ONE NOTCH FOR
NOTTING HILL HOUSING GROUP
We have lowered the BCA of Notting Hill Housing Group (Notting Hill) by
one notch to baa2 from baa1 and downgraded the final rating to A3 from
A2, and have changed the outlook to stable from negative.
The lowering of the BCA reflects a weakened financial management score,
driven by a lack of adherence to its treasury policy sustained for several
months. The downgrade of the final rating reflects the sector-wide
impact of a weaker sovereign rating.
Notting Hill's treasury policy, revised in March 2016,
calls for sufficient liquidity to cover all committed development,
or, if higher due to aspirational development, 18 months'
projected cash flow. Due to a combination of funding not materialising
as planned and deferring of funding due to its merger discussions with
Genesis Housing Association, the current position stands at 15 months.
While Moody's expects the policy breach to be resolved in the coming
months, given the association's profile as a significant developer
with a sustained high exposure to market sales activity, a lack
of adherence to the policy negatively impacts its credit profile.
Once funding is obtained, Notting Hill's liquidity coverage
ratio is expected to recover to 1.3x in line with a rated peer
median of 1.4x.
WHAT COULD MOVE THE RATINGS UP/DOWN
Strengthening credit metrics of standalone BCAs, which may include
reducing exposure to market activity, decreasing debt levels and
strengthening governance, could put upward pressure on individual
ratings.
Downward ratings pressure on HAs would be prompted by a further weakening
of the UK government's credit profile, as reflected by another downgrade
of the sovereign rating. Additionally, any sector or issuer-specific
risks would place downward pressure on the ratings.
5) RATIONALE FOR THE DOWNGRADE OF THE RATING OF PRS FINANCE PLC
The downgrade to (P)Aa2 from (P)Aa1 for the senior secured debt rating
assigned to the PRS Finance Guaranteed Secured Bond Programme reflects
the downgrade of the sovereign rating, as the rating is based solely
on the unconditional and irrevocable guarantee provided by the DCLG.
As such, any movement in the UK sovereign rating will affect PRS
Finance's rating.
WHAT COULD CHANGE THE RATING UP/DOWN
The guaranteed senior debt rating is linked to that of the UK.
Any change in the rating of the UK would be expected to translate into
a rating change on the bonds.
PUBLICATION OF RATING ACTIONS ON LOCAL AUTHORITIES
The downgrade of the UK's sovereign rating prompted the publication
of this credit rating action on Cornwall Council, Guildford Borough
Council, Lancashire County Council, Aberdeen City Council
and Warrington Borough Council on a date that deviates from the previously
scheduled release date in the sovereign release calendar, published
on www.moodys.com.
The specific economic indicators, as required by EU regulation,
are not available for these entities. The following national economic
indicators are relevant to the sovereign rating, which was used
as an input to this credit rating action.
Sovereign Issuer: United Kingdom, Government of
GDP per capita (PPP basis, US$): 42,481 (2016
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 1.8% (2016 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.6%
(2016 Actual)
Gen. Gov. Financial Balance/GDP: -3%
(2016 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -4.4% (2016 Actual)
(also known as External Balance)
External debt/GDP: [not available]
Level of economic development: Very High level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 21 September 2017, a rating committee was called to discuss the
ratings of Cornwall Council, Guildford Borough Council, Lancashire
County Council, Aberdeen City Council and Warrington Borough Council.
The main points raised during the discussion were: The issuers'
fiscal or financial strength, including their debt profile,
has materially decreased. The systemic risk in which the issuers
operate has materially increased.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_197362
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and provides, for each of the credit
ratings covered, Moody's disclosures on the following item:
* Person Approving the Credit Rating
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 credit rating action on the support provider and in relation to
each particular credit 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 credit rating action,
and whose ratings may change as a result of this credit 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.
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 rating 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.
Jeanne Harrison
Vice President - Senior Analyst
Sub-Sovereign Group
Moody's Investors Service EMEA Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
David Rubinoff
MD - Sub Sovereigns
Sub-Sovereign Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service EMEA Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
