Moody’s comments on risk of Universal Credit


Universal Credit – what are the risks?

Universal Credit poses a risk to housing associations but it should be manageable, according to the ratings agency, Moody’s new report, dubbed ‘English Housing Associations: Lingering Downside Risks Despite Positive 2012 Results’. Universal Credit could have put pressure on Moody’s rated housing associations, yet according to the report they are headed in the right direction to manage these pressures. In addition, there have been positive financial results in the sector during 2012, which has also helped derive the conclusion that the housing associations will manage the obstacles set in their path by Universal Credit.

The new system could lead to issues with rent collection, but according to the report, tenants “are likely to continue to make payments in an orderly and timely fashion”.  The report does acknowledge however that structural loss of income from weak rent collection could put stress on ratings. It noted that many housing associations have increased sales and commercial activities to allow decreased capital grants from the government.

“This source of income is less stable than traditional social-housing letting and fluctuates with market conditions, adding uncertainty to projections. An inability to manage sales turnover and related cash flow, leading to higher debt levels, would be credit negative,” said the report.

Cash flow may be strained in the future due to market volatility from floating-rate debt and hedging positions, and increased interest rates may also contribute to strains.

Commenting on the operating margins of its rated associations, Moody’s states: “The average operating margin of the housing associations rated by Moody’s rose to 27% of revenue in 2012 (2011: 25%), supported by a steady growth in social-housing letting given rental inflation, and in some cases rent convergence, and new builds coming on-line. Saffron Housing Trust reported the strongest operating margin at 43%, while AmicusHorizon reported the weakest at 17%. Variance across the rated peers was largely due to differences in cost controls, the legacy of expensive refurbishment programmes to achieve minimum quality standards, and more broadly the business mix (i.e. exposure to lower-margin support and care, and more volatile sales).”

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