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Orbit credit rating downgraded due to market exposure
Large housing association Orbit has had its credit rating downgraded due to a large development programme and exposure to market risk.
Ratings agency Moody’s downgraded Orbit from A2 to A3, the same rating as London’s largest housing association, L&Q.
The downgrade comes two months after Moody’s revealed that of all the housing associations in Moody’s portfolio, Orbit is the most exposed to market sale, making 37% of its revenue from that tenure in 2017/18.
According to Wednesday’s ratings action by Moody’s, the 42,000-home association was downgraded because it scaled up its development programme to deliver 2,000 homes per year after 2020 from an average of 1,700 in previous years.
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It added that an increased exposure to market sale was also part of the reason, noting: “Orbit’s current business plan forecasts that the housing association will grow its housing stock by 20% over the next five years, and that market sales activity will contribute 44% of revenues in 2021, from 31% in 2016.”
Moody’s said that this exposure will mean that Orbit’s operating margin will stays at the lower end of its portfolio of housing associations, because margins from market sale are expected to be lower than margins for social housing.
It also said, however, that Orbit has enough liquidity to cover the amount it plans to spend over the next two years and unencumbered assets worth £916m, 3.7 times the amount the group forecasts it will need in funding over the next four years.
Moody’s added that it thinks Orbit has “a straightforward governance structure and financial, debt and investment management that is considered adept in enabling strong oversight and managing financial and operational risk through well-articulated policies and practices”.
Orbit, which manages homes in the Midlands, the East of England and the South East, raised £450m on the bond market in June last year, shortly after its credit outlook was downgraded by Moody’s.
Joy Baggaley, group finance director at Orbit, said: “We are ambitious in our plans to continue the delivery of a substantial housebuilding programme towards realising our vision of building thriving communities.
“We are confident that our robust governance framework, liquidity and the strength of our business gives us the financial resilience we need to deliver our strategy and a further 20,000 homes in the next 10 years.”
Last year, Jeanne Harrison, vice-president at Moody’s Investors Service, warned that housing associations that are more exposed to market sale will find their margins more “squeezed” in the case of a no-deal Brexit, an outcome that a number of candidates for the Conservative leadership have said would be better than not leaving the EU on 31 October.
Update: at 11.30 on 30.5.19 This article was updated to clarify that it is specifically Orbit’s operating margin that will be at the lower end of Moody’s portfolio, not Orbit as an organisation. It was also updated to clarify that Orbit’s unencumbered assets are worth £916m, not Orbit’s total assets.
