In this article, S&P Global Ratings presents the seven key factor assessments it uses to determine the enterprise risk profile (ERP) and financial risk profile (FRP) of its rated portfolio of 62 non-U.S. social housing providers (SHPs).

Our "Methodology For Rating Public And Nonprofit Social Housing Providers," published June 1, 2021, is guided by a framework that evaluates the enterprise risk and financial risk of an SHP as the starting point for determining an anchor. The stand-alone credit profile is established after applying overriding factors, caps, and holistic analysis, as applicable, to the anchor. Final ratings are reached after incorporating any external factors.

The criteria determine an SHP's anchor using a framework that considers the SHP's ERP and FRP. Both the ERP and FRP assessments are determined based on a weighted average of three underlying key factor assessments. The ERP and FRP assessments and each underlying key factor assessment can range from 1.0 (strongest) to 6.0 (weakest). We apply integer values for all key factor assessments except industry risk and market position, where a midpoint value can also be assigned due to the construction of these two factors. Industry risk can be, and market position is, based on an unrounded average of two subfactors, and therefore, a midpoint outcome is possible.

The ERP assessment is the weighted average of our assessment of the following three key factors: industry risk (weighted 20%), market position (40%), and management and governance (40%). The FRP assessment is the equal-weighted average of our assessment of the following three factors: financial performance, debt profile, and liquidity. Each underlying key factor assessment that comprises the ERP and FRP assessments uses an initial assessment that may be subject to adjustments, as described in the relevant section for each key factor assessment in the criteria.

A change in score does not in all cases lead to a change in the rating, nor is a change in the rating necessarily predicated on changes in one or more of the scores. In determining the final rating, the committee can make use of the flexibility afforded by paragraphs 13-15 of "Methodology For Rating Public And Nonprofit Social Housing Providers," published June 1, 2021. The ratings and scores are as of Oct. 31, 2023.

Industry Risk

Seven of our rated entities have an industry risk assessment of '3', indicating that their exposure to riskier activities exceeds one-third of their adjusted operating revenues, including sales revenue from any joint ventures that they are engaged in. Greater exposure to riskier activities typically implies a lower rating (see chart 1), with four of the seven entities rated 'A-'. The 'AA-' rated entities typically have no or very limited exposure to riskier activities. Those rated 'A+' typically have moderate exposure to riskier activities accounting for less than 15% of adjusted operating revenues on average. The exposure increases to more than 20% for those rated 'A-'.

Chart 1

Market Position

When assessing an SHP's market position, which contributes 40% of the weighted ERP assessment, we consider the regulatory framework that the SHP operates in and the market dependencies. The latter complement the industrywide and systemic regulatory risk factors. The regulatory framework (see assessment for each SHP in table 1) defines the environment in which the SHP operates. The market dependencies assessment aims to measure an SHP's attractiveness, and therefore the stability and sustainability of its core rental activities, by way of two main indicators: the vacancy rate and the average rent that the SHP offers. We consider these factors to support the rating, and a strong market dependencies assessment typically correlates with a higher rating (see chart 2).

Chart 2

Management And Governance

Our assessment of management and governance is closely linked to the rating. The weaker the assessment, the lower the rating (see chart 3). Seven of our rated SHPs have a negative management and governance assessment of '4' or '5', an increase from five since March 2023, and the ratings are at the low end of those in our portfolio, at 'A-' or below. At the same time, 30 SHPs, or close to 50% of our portfolio, have a positive assessment of '2', and of these, we rate 25 'A+' or higher.

We have noticed a divergence among our ratings over the past six months, which, in our view, correlates closely with our assessment of management and governance. This is because strategic decisions by management often determine the development of the SHPs' financial indicators.

Chart 3

Financial Performance

We consider that a non-U.S. SHP's financial performance, measured by the consolidated group's S&P Global Ratings-adjusted EBITDA margin, is a strong indicator and driver of the rating (see chart 4). Non-U.S. SHPs rated 'AA-' typically have adjusted EBITDA margins of close to a solid 35%, indicating a financial performance assessment of '3'. We think it is positive that, on average over a five-year period, these SHPs typically maintain such margins despite cost inflation and increasing investments in existing homes.

The adjusted EBITDA margins gradually decline to an average of around 20% for the 'A-' rated entities, indicating an assessment of '4' (see chart 4). Entities rated 'A-' with a negative outlook, or those rated below 'A-', typically see their adjusted EBITDA margins slipping below 20%. The entity rated 'AAA' is an outlier in this case because we equalize the rating with that on the owner, New Zealand.

Chart 4

Debt Profile

The lower the SHP's debt-to-adjusted nonsales EBITDA ratio and the higher the adjusted nonsales EBITDA interest coverage, the greater the likelihood of a higher rating (see chart 5). While the SHPs' financial indicators have weakened across our portfolio of ratings over the past 12 months, most 'AA-' rated entities have maintained a debt-to-nonsales EBITDA ratio of 15x or below (below 15x in March 2023) and adjusted nonsales EBITDA interest coverage of above 4x on average (above 5x in March 2023). This indicates a '2' debt profile assessment.

The ratios gradually deteriorate to about 25x and just over 1x, respectively, indicating an assessment of '5' on average for entities rated 'A-'. Again, the entity rated 'AAA' is an outlier because we equalize the rating with that on the owner, while the entity rated 'AA' has other positive rating drivers that offset the debt profile assessment.

Chart 5

Liquidity

Our assessment of the SHPs' liquidity does not have the same correlation with the ratings as our other assessments (see chart 6), mainly because the entities that we rate 'AA-' typically have lower liquidity coverage, offset by strong ties with their respective government or local authority, which either provides ongoing liquidity support, or would likely provide extraordinary support in a case of need. Otherwise, liquidity coverage remains solid across our non-U.S. SHPs, with sources covering uses by 2x on average. This indicates a very strong liquidity position, with an average score of '2'. Again, the entity rated 'AAA' is an outlier because we equalize the rating with that on the owner.

Chart 6

Table 1

Related Criteria

• Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
• Methodology For Rating Public And Nonprofit SHPs, June 1, 2021
• Group Rating Methodology, July 1, 2019
• Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
• Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010

Related Research

• Regulatory Framework Assessment: Social Housing Providers In The U.K. Benefit From Strong Regulatory Frameworks, Oct. 23, 2023
• United Kingdom 'AA/A-1+' Ratings Affirmed; Outlook Stable, Oct. 20, 2023
• U.K. Social Housing Providers' Credit Headroom Could Tighten If The Operating Environment Deteriorates, published Oct. 4, 2023
• Regulatory Framework Assessment: German Public Housing Providers Face Increasing Political Demands But Benefit From Strong Institutions, Oct. 3, 2023
• Regulatory Framework And Systemic Support Assessments For Nonprofit Social Housing Providers, Sept 08, 2023
• European Housing Markets: Sustained Correction Ahead, July 20, 2023
• Freeze On Livret A Rate Should Boost French Social Housing Providers’ Credit Metrics, July 17, 2023
• Regulatory Framework Assessment: Social Housing Providers In France, May 30, 2023
• United Kingdom Revised To Stable From Negative On Moderating Fiscal Risks; ‘AA/A-1+’ Ratings Affirmed, April 21, 2023
• U.K. Social Housing Borrowing 2023: On Pause, March 28, 2023
• Non-U.S. Social Housing Providers Ratings Score Snapshot: March 2023, March 27, 2023
• Non-U.S. Social Housing Providers Ratings Risk Indicators: March 2023, March 27, 2023
• Non-U.S. Social Housing Providers Ratings History: March 2023, March 27, 2023
• U.K. Social Housing Providers Set Their Sights On Cyber Risks, Dec. 16, 2022
• France Outlook Revised To Negative On Rising Budgetary Risks; 'AA/A-1+' Ratings Affirmed, Dec. 2, 2022
• Non-U.S. Social Housing Sector Outlook 2023: The Most Negative Bias Since 2018 Implies Significant Pressure On Ratings, Dec. 1, 2022
• Cap On Rent Increases Is Consistent With Our Base Case For English Social Housing Providers, Nov. 17, 2022
• U.K. Social Housing Sector Now Displays A More Pronounced Negative Bias In Its Creditworthiness, Oct. 11, 2022
• Launch Of Rent Cap Consultation Adds Uncertainty To Creditworthiness Across English Housing Sector, Sept. 1, 2022
• Rated U.K. Social Housing Providers' Creditworthiness Could Suffer If The Gap Between Rent And Cost Increases Persists, Aug. 1, 2022
• France’s Purchasing Power Bill Would Further Constrain Financials Of Departments But Not Social Housing Providers, July 11, 2022
• Credit FAQ: French Social Housing Providers' Creditworthiness Should Remain Robust Despite Higher Capex Pressure, Feb. 14, 2022