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Orbit credit outlook downgraded ahead of large bond deal
A large housing association has had its credit outlook moved down to ‘negative’ as it gears up to raise bond finance of up to £450m.
Orbit Group retained its high credit rating of A2 in the judgement published by Moody’s yesterday, but saw its outlook downgraded due to its plans to scale up investment and open market sale.
The judgement said the 40,000-home housing association is planning a bond issuance of “between £250m and £450m in long-term senior secured bonds”.
Commenting on the decision to move the outlook down from ‘stable’ to ‘negative’, Moody’s said: “The change in outlook to negative from stable reflects the credit risk stemming from Orbit’s plans to materially increase capital expenditure, as well as the increased proportion of market sales in the group’s development plans.
“Market sales revenues are forecast to increase to 42% of total turnover in [2019/20], from 33% in [2016/17], making Orbit one of the most exposed to commercial activities among rated housing associations.
“As margins from sales are generally lower than Orbit’s social housing letting margin, total operating margin is set to remain low relative to peers, at 26%, through to [2019/20].”
A negative outlook is a signal to investors that the credit rating is more likely to move down than up in coming years.
Nonetheless, Moody’s – which provides credit ratings to many housing associations – said the strong credit rating of A2 would remain.
It said: “The affirmation of the A2 issuer rating on Orbit reflects the entity’s strong cash flow... The rating is further supported by the organisation’s strong market position in the Midlands, and its healthy unencumbered asset position which enhances its borrowing capacity.”
It said Orbit was planning to issue the bonds in 2018/19, which would be drawn in one tranche with no retained finance.
The cash raised will be used to refinance the association’s debt, as well as funding its plans going forward.
Orbit built 1,788 homes in 2016/17, its largest ever development programme, which made it one of the most active builders in the sector. It has targeted development of 2,000 homes per year.
Jonathan Wallbank, director of treasury and corporate finance at Orbit, said: “Orbit is a proven developer with a track record of success. Our long-term strategy is to build more homes. To enable this, and in common with many other organisations within our sector, we are adapting to adverse policy changes by offering a wide range of housing products.
“The change in outlook assessed by Moody’s and reported yesterday was an expected response to our positive strategic direction.”
Update: at 16.14 on 1.6.18 This story was updated to include a comment from Jonathan Wallbank.
