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Rating Action:

Moody's downgrades Places for People's ratings to A3 from A2; assigns (P)A3 rating to Places for People Treasury Plc

25 Jul 2016

London, 25 July 2016 -- Moody's Public Sector Europe ("MPSE") has today downgraded Places for People Homes Limited's (PFP) long term issuer and debt ratings to A3 from A2 and EMTN programme rating to (P)A3 from (P)A2. Concurrently, Moody's has downgraded Places for People Capital Markets PLC's backed senior unsecured debt and EMTN programme ratings to A3 from A2 and (P)A3 from (P)A2, respectively. The negative outlook is maintained. Moody's has also assigned a (P)A3 EMTN programme rating under Places for People Treasury Plc and a provisional (P)A3 rating on its prospective GBP300mn bond issuance with negative outlook.

A full list of affected ratings is provided towards the end of this press release.

RATINGS RATIONALE

Today's downgrade reflects the continued diversification of Places for People's activities into non-core-social-housing businesses, introducing varied risks that are atypical of an English housing association, requiring oversight of an expanding portfolio of activities and depressing margins. The rating continues to reflect PFP's relatively complex debt portfolio with high refinancing risk.

Places for People Homes Limited is the key operating subsidiary of and fully owned by Places for People Group Limited. As such, commentary for Places for People Homes Limited relates to consolidated accounts of the entire Places for People Group.

The proportion of low-risk social housing lettings in PFP's turnover has been significantly below the average of Moody's rated English housing associations over the last five years and continues to decline as PFP seeks opportunities to diversify its activities. While development for outright sales and market rent was previously the core of PFP's commercial activities, more recently PFP has expanded its activities by acquiring companies providing: residential property management; leisure facilities management; retirement property management; construction services; development of premium, sustainable homes; green energy solutions; financial services; and energy services. As a result, non-social-housing-letting activities accounted for 56% of turnover in FY2016 and is projected to increase to 64% in FY2018, compared to a peer average of 27% in FY2015. While this diversification provides some insulation from government policy changes, it requires greater management and oversight of the widened portfolio of activities.

While social housing letting activities recorded very strong operating margins in FY2016 at 40%, operating margins and total margins were significantly lower at 20% and 6%, respectively. This largely reflects the lower profitability of the non-core businesses. Moreover, PFP's continued expansion into activities with less predictable financial performance than the low-risk social housing lettings business increases the potential for cash flow volatility and exposes the entity to risks that are different from a typical housing association. Cash flow volatility interest cover, which adjusts for volatility in pre-interest cash flow from operations, was 1.4x in FY2016 and is projected to decline to 1.1x in 2017.

PFP also has a relatively more complex debt structure than other Moody's-rated housing associations with high refinancing risk, index-linked exposure and foreign currency risk (though hedged through cross currency swaps). PFP's debt increased to GBP2.3 billion at FYE2016 from GBP1.8 billion at FYE2015, and debt to assets increased to 63% at FYE2016, but is expected to decline. Refinancing risk is very high with 44% of debt due within five years as at FYE2016, compared to rated peers' average of less than 10%. However, it was in line with a treasury policy requirement to limit debt maturing within the next five years to 50% of the loan book, which is well above the threshold typically seen in the sector and points to higher risk appetite compared to peers. That said, PFP's management team has adhered to an internal requirement to have enough cash and facilities in place to cover the cash requirements for the next 12 months, including debt repayments. PFP also holds a significant and increasing share of unsecured debt through its EMTN programme, although this is subject to a negative pledge of 110% of assets at Market Value Subject to Tenancies. Given planned debt repayments in FY2017, debt to assets are expected to decline, but refinancing risk is projected to continue to be significantly higher than other rated housing associations.

The rating also factors the combined entity's large size as one of the largest providers of social housing in the UK with geographically diverse operations.

The ratings in the social housing sector continue to benefit from (1) the strong regulatory framework; (2) revenue stability provided by government subsidies (housing benefit), although this may come under renewed pressure from pressures on public finances; and (3) our assessment that there is a strong likelihood that the UK government (Aa1 negative) would intervene in the event that PFP faced acute liquidity stress.

The Places for People Capital Markets PLC's programme and bond ratings are based on PFP's issuer rating and as such have also been downgraded.

As per the application of Moody's Joint Default Analysis methodology for government-related issuers, PFP's baseline credit assessment (BCA) has been set at baa3. The final rating of A3 incorporates the uplift provided by Moody's assessment of a strong likelihood of support from the UK government.

RATIONALE FOR PLACES FOR PEOPLE TREASURY PLC'S RATINGS

The ratings assigned to Places for People Treasury Plc's EMTN programme are solely based on the quality of the guarantees and are ultimately driven by the credit quality of the underlying guarantor, Places for People Homes Limited. Any change in the ratings of the guarantor will have a corresponding effect on the rating of the programme. Moody's has also assigned a provisional (P)A3 rating to the anticipated GBP300 million bond issuance, which reflects the EMTN programme rating of (P)A3. The bonds will be senior unsecured obligations. In the event that the debt structure changes significantly from the documentation submitted to us, MPSE will assess any potential impact on the ratings.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook on PFP's rating is maintained reflecting the negative impact of the vote to leave the European Union on housing associations as well as the negative outlook on the sovereign rating, reflecting the close institutional, operational and financial linkages between the central government and housing associations. Housing associations (HAs) could be affected by renewed pressure on public finances resulting in further policies that would squeeze HA revenues and any further social housing policy changes exacerbating the policy instability that currently underpins our negative outlook on the sector.

What Could Change the Rating -- Up/Down

Upward ratings pressure on PFP is unlikely to develop in the near term in view of the challenging operating environment and weakened sovereign credit conditions. However, one or a combination of the following could have positive rating implications: (1) improving operating margin to levels above 30% of revenues; (2) social-housing-letting interest coverage structurally exceeding 1.5x; (3) debt falling below 50% of assets at cost; (4) reduced exposure to commercial activities; and/or (5) structural reduction of refinancing risk.

Negative pressure could be exerted on the rating by one or a combination of following: (1) further expansion of commercial activities, which would reduce the predictability of revenue; (2) lower than predicted contributions from non-social housing activities; (3) a deterioration in PFP's social-housing-letting interest coverage below 1x or cash flow volatility interest cover below 1x; (4) increasing debt levels; (5) diminished oversight of the expanding portfolio of activities; and/or (6) failure to effectively plan for refinancing risk. In addition, a weaker regulatory framework, a dilution of the 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 European Social Housing Providers published in July 2016, and Government-Related Issuers published in October 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.

LIST OF AFFECTED RATINGS

Downgrades:

..Issuer: Places for People Homes Limited

....LT Issuer Rating, Downgraded to A3 from A2

....BACKED Senior Secured Regular Bond/Debenture, Downgraded to A3 from A2

.....Senior Unsecured Regular Bond/Debenture, Downgraded to A3 from A2

....BACKED Senior Unsecured Regular Bond/Debenture, Downgraded to A3 from A2

....BACKED Senior Unsecured MTN Program, Downgraded to (P)A3 from (P)A2

..Issuer: Places for People Capital Markets PLC

....BACKED Senior Unsecured MTN Program, Downgraded to (P)A3 from (P)A2

....BACKED Senior Unsecured Regular Bond/Debenture, Downgraded to A3 from A2

Affirmations:

..Issuer: Places for People Homes Limited

.....BACKED Other Short Term, Affirmed (P)P-1

..Issuer: Places for People Capital Markets PLC

.....BACKED Other Short Term, Affirmed (P)P-1

Assignments:

..Issuer: Places for People Treasury Plc

...BACKED Senior Unsecured MTN Program, Assigned (P)A3

....BACKED Senior Unsecured Regular Bond/Debenture, Assigned (P)A3

Outlook Actions:

..Issuer: Places for People Capital Markets PLC

....Outlook, Remains Negative

..Issuer: Places for People Homes Limited

....Outlook, Remains Negative

..Issuer: Places for People Treasury Plc

....Outlook, Assigned Negative

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 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.

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.

Jennifer A. Wong
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
SUBSCRIBERS: 44 20 7772 5454

David Rubinoff
MD - Sub-Sovereigns
Sub-Sovereign Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 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
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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