Funding Social and Affordable Housing A Credit Perspective

Key credit risk factors for Social Housing Providers and Associations (SHPAs)

In the first blog of this two-part series, Understanding the Basics of Social Housing Providers and Associations, we looked at some of the fundamentals of social housing. We will now look at the key credit risk factors within this niche sector and discuss our tools that are designed to evaluate the credit risk of SHPAs.

Key questions when assessing an SHPA’s creditworthiness

To reflect the continuous evolution of the public and nonprofit social housing market, a series of questions should be addressed when trying to better understand an SHPA’s financial strengths and weaknesses.

1. How is the industry risk for SHPA assessed? Do sales activities affect the industry risk assessment? In general, the global social and public housing sector is considered to have low competitive risk, due to its effective barriers to entry and minimum risk of substitution, and stable trends in growth and margins. In addition, government support and oversight generally limit the volatility of the sector. The sales activities of an SHPA are deemed to be risker,^[1] however, and revenues from those activities represent more than one-third of adjusted operating revenues. This could increase the industry risk an SHPA is exposed to, because they can limit the predictability of future earnings and reduce the ability of the SHPA to withstand external risks.
2. What is the SHPA’s specific market position in the relevant market? The key operating features of an SHPA ‒ including its business attractiveness, the systemic support and management strategy and policies ‒ indicate the unique competitive risks faced by individual providers that may mitigate or exacerbate traditional industry risks.
3. Does the SHPA have long-term planning and a good level of expertise in managing risks? The SHPA’s overall strategy, financial policies, long-term planning, and level of management expertise are vitally important to the entity and its operational performance metrics, which relate to, or directly affect, cash flow generation. A few factors can result in a vulnerable management and governance position of the entity. This can include deficient management or lack of governance, such as frequent turnover, absence of management oversight and a lack of management experience in the sector. It can also include material deficiencies in maintaining the properties, such as failure to comply with standards that put required licenses at risk.
4. What is the SHPA’s profitability level? Can its revenue flows cover the financing costs and debt obligations? The housing provider needs to keep its promised housing service, maintain its housing stocks and, ultimately, serve its debt obligations. An SHPA with a strong level of profitability and stable financial performance is likely to be able to meet its operating performance and fulfil its public mission.
5. Does the SHPA have robust liquidity to cover all the expected cash outflows and remain resilient under any circumstances? The SHPA’s liquidity is measured by its liquidity needs versus the potential sources of liquidity. Also, strong, or exceptional access to a government-backed liquidity source, or access to market funding such as bank loans, bonds, or commercial papers, can assist the provider with liquidity buffers. This can help it weather a temporary liquidity drop during adverse macroeconomic stress, such as COVID-19 and the Brexit uncertainty, and/or cope with increasing maintenance and capital spending.
6. How does the government regulatory framework impact the credit assessment of an SHPA? A stable and predictable regulatory framework, as well as an effective fiscal framework, can ensure an SHPA receives stable ongoing systemic support provided by the government through an adequate revenue/expenditure match, plus sufficient flexibility to address any potential financial imbalance that can potentially benefit the SHPA’s credit quality. On the other hand, if any severe stress were to affect housing associations, especially those in devolved regions, the likelihood of the SHPA receiving extraordinary financial support from their respective government can potentially impact the final credit assessment of the SHPA.

S&P Global Market Intelligence’s SHPA Scorecard has been constructed to assist in analyzing the specific risk factors relevant to SHPAs. This includes such factors as industry risk, specific enterprise risk, financial and liquidity risk. Moreover, the Scorecard is also able to factor in the on-going support of the government and the supportive regulatory framework for the sector, as well as any additional support the government would provide during extraordinary situations.

With the continuous changes taking place in the social and affordable housing sector and providers seeking funding in the private sector, the SHPA Scorecard is an effective tool to assist lenders and/or investors with credit assessments on housing providers.

Learn more about our SHPA Scorecard here.