Moody’s reconfirms Southern Housing’s A3 stable credit rating

Moody’s has reaffirmed Southern Housing’s A3 stable credit profile , noting that the housing association’s large size, along with its robust balance sheet and strong liquidity, means that its credit challenges are well reflected at its current rating level.

The credit agency added that a significant amount of the 73,000-home housing association’s medium-term risk has been mitigated through the reduction of its development programme.

An A3 rating from Moody’s is a medium investment grade credit rating, signifying that the issuer is a relatively safe investment and at low risk of default. It is the seventh highest investment grade on Moody’s scale.

Moody’s update noted that despite Southern’s liquidity coverage ratio dropping from 2.7x to 1.5x in the 2023/24 financial year due to increased cash needs for the current financial year, the organisation still has a very strong liquidity position.

>> See also: Southern stops committing to new developments as surplus falls

>> See also: Southern chief executive announces overhaul of service charges

The update also highlighted that, as of the end of the 2023/24 financial year, nearly half (47%) of Southern’s assets are financed through debt. However, Southern holds approximately £3.7bn that are not used as collateral for debt.

Moody’s added that Southern is expected to borrow further in the current financial year to compensate for development delays caused by several contractor insolvencies.

Once sales from these projects are finalised, Southern’s total debt, which has peaked at £3.4bn this financial year, is projected to decline due to the substantial reduction in its development programme.

Moody’s noted that Southern has historically been a major developer in the sector, with over 6,500 units completed over the past five years.

However, it has shifted its strategy due to high costs, inflation, and market challenges and significantly scaled back its development programme.

Southern will focus on completing existing projects and those in advanced planning, halting major new developments.

Southern will deliver 2,500 units over the financial years 2025 and 2026, and then scale down to approximately 700 units in financial year 2027, with delivery dropping to close to zero after this.

>>See also: Southern stops committing to new developments as surplus falls

Southern’s operating margin has dropped to 12%. Its social housing letting interest cover is 0.7x, meaning it currently covers 70% of its interest payments on debt. This is due to inflation and contractor issues causing delays and higher costs.

However, its operating margins are expected to improve to an average of 19% over the next three years as delayed projects and sales are finalised.

Despite its weakened interest cover metrics, Moody’s said Southern retains decent interest cover covenant headroom at around 70-80 basis points as of the end of the 2023/24 financial year and over the life of the plan. 

Southern Housing was formed from the merger of Optivo and Southern Housing Group on 16 December 2022, creating one of the largest HAs in England with 73,041 units under management at 31 March 2024, predominantly in London and the South East.

Paul Hackett, Southern Housing’s CEO, said: “We’re delighted to retain our A3 stable rating with Moody’s, reflecting strong liquidity and Southern Housing’s strong balance sheet. Our A rating gives Southern Housing access to the widest pool of bond investors.

Hackett stated that Southern will build out its 3,700-home development pipeline over the next three years, but is ”not committing to new starts, as, along with many other large London based housing associations our EBITDA-MRI cash interest cover is well below 100%.

”This is clearly not sustainable. We’re working with the G15, the National Housing Federation and others to make the case for a series of measures that will help unlock housing association balance sheets and deliver government’s ambitious affordable housing targets,” he added.

“This includes a long term CPI+1% rent settlement, the reintroduction of rent convergence, the extension of the Building Safey Fund to rented homes and higher grant rates and longer term funding via the Social Housing Decarbonisation Fund and the Affordable Homes Programme.

”We share government’s ambitions and want to work with the new government to unlock housing association capacity. Building affordable homes is in our DNA, but as the sector increases investment in existing homes something must give and for the time being that has been new development.”