Optivo has had its Moody’s A3 credit rating reaffirmed as the agency flagged the association’s strong balance sheet but said that its margins are expected to weaken and its debt will rise over the next two years.
The 42,000-home landlord was downgraded from A2 to A3 in October last year by Moody’s because of its growing debt burden and decreasing interest cover ratio.
In its most recent opinion, published late last week, Moody’s said that Optivo’s strengths remain its strong balance sheet, core social housing business and sufficient liquidity, which includes additional borrowing capacity of £1.4bn.
However, the agency also pointed out that Optivo’s margins are “expected to weaken over the next two years before starting to recover from fiscal 2024, while its debt will continue to rise to fund its development programme”.
The group’s net debt is expected to peak at £2.7bn around 2027.
The landlord’s rating was downgraded last year partly as a result of fire safety costs. Optivo currently estimates that it will spend around £250m over the next 10 years on fire safety works, which Moody’s said will depress its margins.
Despite this, Optivo’s operating margin crept back up by a percentage point to 23.6 per cent in its the last financial year, and it improved its social lettings margin to 27 per cent from 25 per cent over the same period.
In its most recent annual report, Optivo revealed that it is easing up on its development plans because of the increased spend on fire safety, and that it is aiming to have started 5,500 new homes by 2025.
Moody’s said that Optivo had reduced its exposure to outright market sales and shared ownership but that it will still increase over the next few years as market sales are expected to hit 19 per cent of turnover in 2023, compared to 14 per cent in 2020. However Moody’s said the 19 per cent figure would be “predominantly” shared ownership sales.
Of the properties expected to be built in the next five years, 61 per cent will be social rented accommodation, with 31 per cent shared ownership and five per cent outright sale.
The credit ratings agency said: “The stable outlook on Optivo’s rating reflects the view that the planned increase in borrowing and consequent impact on debt and interest cover ratios is balanced by the organisation’s large size and resilient balance sheet supported by strong core social housing lettings business.”
As of July this year, Optivo’s liquidity was made up of £64m in cash and £640m in undrawn, immediately available facilities.
Moody’s said Optivo had exited the “less profitable” specialised care sector and let go of student housing properties in Southampton.
The landlord also sold £100m of retained bonds in August this year, which it said will be used for general corporate purposes.
The agency said the landlord also benefited from the strong regulatory framework governing housing associations in England. Moody’s outlook on the group remains ‘stable’.
A spokesperson for Optivo said: “Our credit rating, in the top half of the A3 category, is unchanged from last year. This isn’t a surprise given our results have been as expected and our plans broadly unchanged.
“The big changes to our medium-term financial planning (to account for higher building safety costs) have been embedded in our plans and decision-making for a number of years now.
“We sold £100m retained bonds in August at levels which reflect our strong A3 rating, and this gives us confidence in Moody’s assessment in their 10th year of rating us.”