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ARCHIVE | Criteria | Governments | Request for Comment: Methodology For Rating Public And Nonprofit Social Housing Providers

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ARCHIVE | Criteria | Governments | Request for Comment: Methodology For Rating Public And Nonprofit Social Housing Providers

(Editor's Note: This article, published Dec. 8, 2020, has been superseded by "Methodology For Rating Public And Nonprofit Social Housing Providers," published June 1, 2021.)

OVERVIEW AND SCOPE

1. S&P Global Ratings is proposing revisions to its "Methodology For Rating Public And Nonprofit Social Housing Providers," published Dec. 17, 2014, and requesting comments on the proposed changes.

2. These proposed revisions should be read in conjunction with the related guidance (please see Appendix, "Proposed Guidance: Methodology For Rating Public And Nonprofit Social Housing Providers"). We expect to publish the content of the Appendix as a separate guidance document when we publish the final criteria, but include it here to help readers understand our proposed criteria and how they would be implemented.

3. These proposed criteria (we use "criteria" and "methodology" interchangeably here) provide the framework for how we analyze key risks relevant for assessing creditworthiness of public and social housing providers (hereinafter referred to collectively as "housing providers") that we believe have typically all of the following characteristics:

  • The entity has a public purpose mission;
  • The entity is not commercially motivated, as may be demonstrated by a not-for-profit status; and
  • Gains or profits may be generated but the entity generally retains such funds for the purposes of fulfilling its public purpose mission; however, it may distribute earnings to another entity with a direct and explicit public purpose mission.

4. Further considerations that reflect evolving credit stories may be taken into account when determining which criteria should apply, for instance, the impact of a housing provider's transformation process toward an overall more profit-seeking business model.

5. These proposed criteria do not apply to for-profit entities or associated groups of entities without a public service mission, even if they operate in affordable or social housing markets; such entities are evaluated using "Key Credit Factors For The Real Estate Industry," published on Feb. 26, 2018.

6. This proposed criteria article is related to our criteria article "Principles of Credit Ratings", published Feb. 16, 2011. The proposed methodology, if adopted, would apply to global scale, local currency, long-term issuer credit ratings (ICRs) and issue ratings on all housing providers globally. The global scale, foreign currency, long-term ICR is the lower of the related sovereign's transfer and convertibility (T&C) assessment and the housing provider's local currency ICR. The foreign and local currency ratings incorporate, if relevant, the sovereign stress test as per "Ratings Above The Sovereign: Corporate And Government Ratings—Methodology And Assumptions," published Nov. 19, 2013. Also see "Criteria For Determining Transfer And Convertibility Assessments," published May 18, 2009, for our T&C assessment criteria. Most often, local and foreign currency ICRs on a housing provider are the same. Where applicable, we assign short-term ratings based on the long-term rating assigned under these proposed criteria, as set out in "General Criteria: Methodology For Linking Long-Term And Short-Term Ratings," published April 7, 2017.

PROPOSED CHANGES FROM PREVIOUS CRITERIA

7. The proposed criteria generally maintain the fundamental concepts of the existing framework. Our main proposed adjustments are as follows:

  • We clarify the scope of the criteria, to better outline the circumstances under which housing providers would be analyzed under these or other criteria.
  • We capture more explicitly within our proposed criteria situations where housing providers have diversified into riskier activities, such as property development for sale. In particular, this is considered in our industry risk analysis within the enterprise risk profile (ERP), and in the debt profile analysis within the financial risk profile (FRP).
  • We better capture systemic factors through the introduction of the regulatory framework and systemic support assessment (which replaces the use of a cap based on the country risk assessment), and the possibility to modulate the industry risk assessment.
  • We more precisely reflect credit factors through recalibration of the ERP and FRP assessments, as well as of the underlying key factor assessments and their weightings. Specifically, the market position now combines our assessment of market dependencies and regulatory framework and systemic support, equally weighted. Our assessment of management and governance is now a separate factor and includes aspects relating to financial policies that were previously analyzed in the FRP. Within the FRP, the three remaining factors are now equally weighted.
  • We enhance flexibility in the analysis through the addition of split ratings to the matrix that determines the anchor (table 2), the introduction of a holistic adjustment of one notch, and the expanded impact of qualitative adjustments when applied to initial assessments.
  • We allow more differentiation in the analysis by making thresholds of the debt profile and liquidity initial assessment more granular.

IMPACT ON OUTSTANDING RATINGS

8. S&P Global Ratings maintains 85 public ratings globally on entities rated under these criteria. Given the targeted nature of the changes described in paragraph 7, we expect limited impact on outstanding ratings. Assuming that the housing providers maintain their current credit characteristics, our testing suggests that about 10% of our public ratings could see a potential impact of one notch, with more upgrades than downgrades. Separately, two entities may potentially no longer be rated under these proposed criteria based on the proposed scope language in paragraph 3. Rating changes could result to the extent different criteria were to apply to entities that could no longer be rated under the proposed social housing providers framework.

QUESTIONS

9. S&P Global Ratings is seeking responses to the following questions:

  • What is your view on the proposed Request for Comment?
  • What is your view on our proposal to introduce the regulatory framework and systemic support assessment?
  • What is your view on our proposal to assess a housing provider's debt profile using ratios based on its non-sales EBITDA, excluding earnings from development for sale activities?
  • What is your view on our proposed rating caps in situations where liquidity constitutes an overarching credit risk?
  • Are there any other views regarding this proposed methodology that you would like to bring to our attention?

RESPONSE DEADLINE

10. We encourage interested market participants to submit their written comments on the proposed criteria by Jan. 31, 2021, to http://www.standardandpoors.com/en_US/web/guest/ratings/rfc where participants must choose from the list of available Requests for Comment links to launch the upload process (you may need to log in or register first). We will review and take such comments into consideration before publishing our definitive criteria once the comment period is over. S&P Global Ratings, in concurrence with regulatory standards, will receive and post comments made during the comment period to www.standardandpoors.com/en_US/web/guest/ratings/ratings-criteria/-/articles/criteria/requests-for-comment/filter/all#rfc. Comments may also be sent to CriteriaComments@spglobal.com should participants encounter technical difficulties. All comments must be published but those providing comments may choose to have their remarks published anonymously or they may identify themselves. Generally, we publish comments in their entirety, except when the full text, in our view, would be unsuitable for reasons of tone or substance.

PROPOSED METHODOLOGY

Framework

11. The proposed analytical framework is depicted in the chart. The proposed criteria are guided by a framework that evaluates the enterprise risk and financial risk of a housing provider as the starting point for determining the anchor. The stand-alone credit profile (SACP) is established after applying overriding factors, caps, and holistic analysis, as applicable, to the anchor. Final ratings are reached after incorporating any external factors.

image

Determining The Anchor

12. The proposed criteria determine a housing provider's anchor using a framework that considers a provider'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 (the strongest) to 6.0 (the weakest). We apply integer values for all key factor assessments except for industry risk and market risk, where a midpoint value can also be assigned due to the construct of these two factors (i.e., industry risk can be and market position is based on an unrounded average of two subfactors, hence a possibility of a midpoint outcome). For each assessment, the numerical assessment maps to an assessment level descriptor, as illustrated in table 1.

Table 1

Assessment Levels Based On Numerical Assessments For The ERP, FRP, And Underlying Key Factors
Numerical assessment range* Assessment level descriptor
[1.0;1.50] Extremely strong (1)
(1.50;2.50] Very strong (2)
(2.50;3.50] Strong (3)
(3.50;4.50] Adequate (4)
(4.50;5.50] Vulnerable (5)
(5.50;6.0] Highly vulnerable (6)
*The symbols "[" and “]” denote the inclusion of the first and last data point in the range, respectively, and the symbols “(“ and ")" denote the exclusion of the first and last data point in the range, respectively.

13. The ERP assessment is the weighted average of our assessments of the following three key factors: industry risk (weighted 20%), market position (40%), and management and governance (40%).

14. The FRP assessment is the equal-weighted average of our assessments of the following three key factors: financial performance, debt profile, and liquidity.

15. Most of the underlying key factor assessments that comprise the ERP and FRP assessments use the concept of an initial assessment that may be subject to adjustments, as described in the relevant section for each key factor assessment. Key factor initial numerical assessments falling at or near cutoff points could receive the stronger assessment if trends are improving, and the weaker assessment if trends are weakening, reflecting our opinion of the expected future level. Adjustment factors would result in the final assessment being stronger or weaker than that suggested by the initial assessment. We would generally adjust the initial assessment by up to one assessment level for each individual adjustment that is applicable, and generally by up to two assessment levels if multiple cumulative adjustments are applicable.

16. The anchor results from the combination of the ERP and FRP assessments (see table 2). When two outcomes are listed for a given combination of ERP and FRP assessments, we determine the anchor based on:

  • Expected improvement or deterioration (not already captured in the underlying key factor assessments) that would move either the ERP or FRP assessment and in turn likely strengthen or weaken the housing entity's creditworthiness over time;
  • The relative position in the ERP/FRP range;
  • Our view of the housing entity's credit standing relative to that of other housing entities;
  • Strengths or weaknesses that we consider have not been captured in any key factor assessment, because an assessment was already at the maximum of '1' or minimum of '6'.

Table 2

Determining The Anchor For A Housing Provider
Financial Risk Profile
Enterprise Risk Profile Extremely strong Very Strong Strong Adequate Vulnerable Highly Vulnerable
Extremely strong aaa/aa+ aa+/aa aa-/a+ a/a- bbb+/bbb bb+/bb
Very Strong aa+/aa aa/aa- aa-/a+ a/a- bbb/bbb- bb/bb-
Strong aa-/a+ a+/a a/a- bbb+/bbb bbb-/bb+ bb-/b+
Adequate a+/a a/a- a-/bbb+ bbb/bbb- bb/bb- b+/b
Vulnerable bbb+/bbb bbb/bbb- bbb-/bb+ bb+/bb bb-/b+ b/b-
Highly Vulnerable bb+ bb bb- b+ b b-

Overriding Factors, Caps, And Holistic Analysis

17. Certain conditions result in the SACP moving a specified number of notches below the anchor. Other conditions place a specific cap on the SACP, such that it may be lower than the anchor. Examples of these factors are outlined in table 3.

18. When the application of several overriding factors or caps is warranted, we adjust the anchor by the cumulative effect of overriding factors and take into account the lowest cap indicated by those adjustments, as per table 3. Depending on the severity of the conditions, we can also assign an SACP below the cap.

19. A holistic analysis is considered after applicable overriding factors and caps to help capture a broader view of creditworthiness (see chart). When relevant, the holistic analysis can have a one-notch impact up or down, and is not limited by any issuer-specific caps or overrides. It can also result in no rating change at all. The analysis may be based on credit risk factors including our forward-looking view of operating and financial performance, if not already incorporated in the anchor. It may also reflect a comparable ratings analysis, or specific strengths or weaknesses that are not fully reflected through the application of the methodology.

Table 3

Overriding Factors and Caps That Are Used To Arrive At The SACP From The Anchor
Factors that cap the SACP in the 'b' category
A perceived lack of willingness to honor the obligation(s) in full and on a timely basis, for example, due to the prioritization of operational over financial obligations
Factors that cap the SACP in the 'b' or 'bb' category
Liquidity risk See “Capping the SACP due to liquidity risk”
Factors that cap the SACP in the 'bb' category
A management and governance assessment of ‘6’
Factors that cap the SACP in the 'bbb' category
A management and governance assessment of ‘5’
Factors that will result in the SACP being one to three notches lower than the anchor
A startup housing provider This gap will generally close over a four-year period as performance informs our view and assessment under the proposed criteria
A provider emerging from receivership or government control following financial distress This gap will generally close over a four-year period as performance informs our view and assessment under the proposed criteria
Event risk that will result in the SACP being one or more notches lower than the anchor
When rapidly rising or unexpected risks are likely to significantly weaken a housing provider’s creditworthiness

Determining the ICR

20. The final ICR may differ from the SACP, based on our analysis of external factors under additional criteria.

21. If the housing provider is considered a government-related entity (GRE), we will use the entity's SACP in applying the GRE criteria to determine the ICR. If the entity is part of a group (generally defined as the term "group" refers to the group parent or ultimate parent, and all the entities -- also referred to as group members -- over which the group parent has direct or indirect control), we analyze the relationships with the group with reference to "General Criteria: Group Rating Methodology," published July 1, 2019, when applicable.

22. If the SACP is higher than the sovereign rating, we will apply "Ratings Above The Sovereign: Corporate And Government Ratings—Methodology And Assumptions," published Nov. 19, 2013, to determine the ICR. When pertinent, the rating on a housing provider will be based on the application of "Ratings Above The Sovereign: Corporate And Government Ratings—Methodology And Assumptions," published Oct. 1, 2012.

23. If none of the aforementioned adjustments in this section apply, the ICR on a housing provider is equal to the SACP.

Determining issue ratings

24. For housing providers based outside the U.S., where it's typical for the entities to issue secured or unsecured debt at the enterprise level as general obligations of the issuer, meaning all resources of the enterprise are available to repay the debt, we would typically equalize the issue credit rating with the ICR, unless we determine that the issue presents contractual subordination risks. If we determine that contractual subordination risks are present, we would typically notch down from the issuer's ICR depending on our analysis of the subordination provisions, by one notch if the ICR is investment-grade, and up to two notches if the ICR is speculative-grade.

25. For housing providers based in the U.S., where it's typical to have a specific revenue pledge and covenant structure for debt issues, we will refer to the criteria, "U.S. Public Finance: Assigning Issue Credit Ratings Of Operating Entities," published May 20, 2015, in assigning the issue credit rating.

26. If a debt issue benefits from a guarantee that meets our guarantee criteria (as explained in "Guarantee Criteria," published Oct. 21, 2016), we would generally rate an issue of a housing provider at the same level as the rating on the guarantor.

ENTERPRISE RISK PROFILE

27. The ERP assessment captures the operating environment and incorporates broad industry factors as well as organization-specific factors. The ERP assessment consists of three factors: industry risk, market position, and management and governance. The proposed criteria calculate the enterprise profile assessment through a weighted average of the three factors as depicted in the chart.

28. Industry risk (weighted at 20%) reflects our opinion of the risks of the public and nonprofit social housing industry globally, relative to other industries. Market position and management and governance are given the highest weighting (both at 40%) as they address how key operating features of an entity, including its business attractiveness, as well as the regulatory framework and systemic support, add or mitigate global industry features of the sector.

Industry Risk

29. The industry risk assessment reflects our view of the risk of the global social and public housing industry as a whole relative to that of other sectors, based on our industry risk criteria (see "Methodology: Industry Risk," published Nov. 19, 2013). Generally, the industry risk assessment does not differentiate individual providers from each other; rather, it helps provide transparency into relative levels of risk across industries. Accordingly, all providers of the same type would receive the same industry risk assessment.

30. We note that some housing providers have chosen, or we expect them, to diversify their business to include activities that we believe add risk to their earnings profile, their balance sheet, or both, such as commercial activities and development for sales (including activities involving joint ventures). Under such circumstances, when a housing provider has (or we expect them to have) a structural/fundamental shift in its profile and that shift, in our opinion, adds risk, we may derive a blended industry risk assessment using more than one industry risk assessment, if we determine that no single industry risk assessment adequately captures our view of overall industry risk for the given provider. We may combine the industry risk assessments derived from various industries as provided in our industry risk assessments commentary. We would generally determine the industry risk assessment based on the relative share of total operating revenues that originate from the riskier activity:

  • If the riskier activity represents less than one-third of total operating revenues, we would assign the industry risk assessment for social and public housing providers;
  • If the riskier activity represents more than two-thirds of total operating revenues, we would assign the relevant industry risk assessment for that activity (for example, for open market sales activity, we would assign the industry risk assessment for homebuilders);
  • If the riskier activity represents between one-third and two-thirds of total operating revenue, we would assign a midpoint between the two relevant industry risk assessments.

31. We would generally assess the relative share of revenue over the same time period as we consider in our analysis of financial performance and the debt profile. We may use an alternative measure (such as EBITDA or total assets), rather than revenues, if we believe that better captures the housing provider's industry exposure.

Market Position

32. Our market position assessment would be based on two subfactor assessments: regulatory framework and systemic support, and market dependencies. The final market position assessment is the equal-weighted average of these two subfactor assessments.

Regulatory framework and systemic support

33. The regulatory framework and systemic support are of key importance when assessing housing providers' ERP because they define the environment in which these entities operate in a particular country. In our view, they influence the positioning of entities on their respective markets and have a significant bearing on their financials. Also, we believe that the regulatory framework and systemic support complement the industry risk assessment, which emphasizes comparability of global industry risks without consideration of country-specific aspects.

34. Our analysis of the regulatory framework and systemic support would reflect two main considerations: our view of the public policy mandate and regulatory mechanisms on the one hand, and of the systemic support or negative intervention and fiscal framework on the other hand. These two considerations are reflected through assessment of four areas (see table 4).

35. We would first assess to what extent the framework under which housing providers are established in a particular country entrusts them with a public policy mandate that firmly anchors their role and essentiality as service providers. We would also assess whether the relative strengths of the framework provide a protective, safe, and stable operating environment. Among other factors, regulatory stability and predictability affect the capacity of entities active in the sector to make strategic decisions, including viable and realistic multiyear investment plans. Governmental oversight over the sector as well as the quality of the accounting and public disclosure standards would also be key in informing our view of how systemic or individual situations of stress could be first detected and second remedied if support exists.

36. In a second stage, we would assess the effectiveness of the fiscal framework in providing financial stability, either through various forms of systemic ongoing and exceptional support or through an adequate revenue/expenditure match or sufficient flexibility and autonomy to redress a potential financial imbalance. Conversely, we would also track precedents of systemic negative intervention and how they have affected the sector's creditworthiness, in order to assess whether such circumstances could recur.

37. All four components of table 4 would be equally important. Our regulatory framework and systemic support assessment would typically reflect the rounded average of those four components. We would select between two assessments listed in each column depending on the extent to which a housing provider meets the described characteristics. In particular, a housing provider with stronger characteristics would receive a better assessment (for example, 1), while one whose characteristics might not be as strong would receive a weaker assessment (for example, 2).

38. We would generally expect all housing providers within a single country to carry the same assessment, but we do recognize that there may be situations where two providers (most often two different classes of providers, for example, social housing providers and public housing authorities in the U.S.) within the same country may carry different assessments as a result of being exposed to different regulatory framework and systemic support. Separately, we may assign more than one regulatory framework and systemic support assessment in a given country, recognizing that in some countries (for example, federal countries), regulatory frameworks may vary among subnational governments.

Table 4

Assessment Of Regulatory Framework And Systemic Support
1 or 2 3 or 4 5 or 6
Public policy mandate and regulatory framework
The housing providers benefit from a very strong public policy mandate and are operating under a stable and well-established framework that makes them key providers in the sector. The housing providers benefit from public policy mandates and account for a significant proportion of the sector activities (compared with for-profit providers). Such policies are subject to regular changes that may introduce some degree of uncertainty in the framework. The housing providers operate under a loosely defined framework that changes frequently (or under short notice) thereby introducing a high degree of uncertainty to the providers. Housing providers account for low coverage of the sector.
There is strong oversight of the sector with high standards of governance, reporting, and disclosure so that sector or individual risks are identified and remedied at an early stage. There is evidence of oversight of the sector and standards of governance, reporting, and disclosure are detailed; however, responsiveness and remediation to early signals of risk and stress are less effective. Oversight and standards of governance are limited; reporting and disclosure standards lack sufficient detail. The standard of reporting, timeliness, and/or oversight do not provide advance warning to allow for effective responsiveness or proper remediation plan(s).
Forms of support and negative intervention
Either: Strong, stable, well-established, and effectively operating forms of systemic ongoing and/or exceptional support, which can be direct (to the sector) or indirect (via the tenants). Examples of this include: direct grants to the sector, guarantees, direct access to well-established form of liquidity/funding from central government, tax incentives/concessions/welfare benefits distributed to tenants. Or: Fiscal framework ensures a very solid match of revenue/expenditure with significant flexibility to redress potential misalignment so that debt is sustainable in the long term, and refinancing and pension-related risks firmly contained. Either: Some forms of ongoing and/or exceptional systemic support are in place; however, we believe support may not be forthcoming in all circumstances as expected. Or: Fiscal framework provides some flexibility and incentive for achieving revenue/expenditure match and containing debt and pension liability accumulation/refinancing risks but in practice effectiveness is questionable as financial performances are primarily down to individual entities and vary greatly across the sector. Either: Forms of ongoing and/or exceptional systemic support are very limited, or systemic support exists but precedents prove that it lacks depth, reliability, predictability, and/or consistency. Or: Fiscal framework is loosely defined and does not provide housing providers with either financial flexibility or incentives/constraint to contain debt accumulation and/or refinancing pension-related risks.
No precedent of adverse negative intervention from governments or their agencies and we do not expect any future negative intervention. Although there have been no past events of negative intervention, negative intervention from governments or their agencies might occur in the future. There have been repeated forms of negative intervention from governments or their agencies.
Market dependencies

39. The market dependencies assessment would encompass company-specific features that complement industrywide and systemic regulatory risk factors in shaping an entity's position in the market. It intends to measure a housing provider's attractiveness, hence the stability and sustainability of its core rental activities by way of two main indicators: the vacancy rate and the average rent levels offered by the housing provider (see table 5). In each case, the comparisons are made to local or national market conditions, subject to the provider's position in the market and data availability. When combined together, both indicators form the initial assessment, which may be further adjusted if it does not fully reflect the entity's real position in the market. In particular, business attractiveness and stability may be further impaired or enhanced by the entity's competitive environment, and/or the size and location of the housing stock. In addition, we may choose to adjust further the initial assessment to ensure consistency with international peers.

40. If we assess that vacancies are "on par with the market," table 5 shows two possible outcomes for each cell. In selecting the initial assessment, we would consider the housing provider's relative demand strengths compared with those of domestic peers, based, in particular, on where the average rent to market rent ratio is positioned within the relevant band.

41. In our application of table 5, we would typically consider vacancy rate data based on a three-year historical average, and the comparison of average rent to market rent as a point-in-time assessment based on the most recent available data or nearest estimate. We may adjust the data based on trends.

Table 5

Assessment Of Market Dependencies
Average rent to market rent (%)*
< 60% [60%;90%] > 90%
Vacancies are significantly lower than market 1 2 3
Vacancies are on par with market 2–3 3-4 4–5
Vacancies are significantly higher than market 4 5 6
Factors that can positively adjust the initial assessment above Factors that can negatively adjust the initial assessment above
Provider exposure to operating volatility is very low due to large volume of units; or large geographic footprint. Provider is exposed to operating volatility due to small volume of units; or small geographic footprint.
Provider benefits from having few, if any, competitors and we believe that this will result in sustained lower vacancy rates, not already reflected in the initial assessment above, despite rent levels that are closer to market rents. The market has many competitors, which could affect the demand or vacancy rate for the provider's units.
Relative to international peers, the initial assessment does not in our opinion fully capture favorable supply and demand dynamics for the housing provider, and vacancies are typically below 2%. Relative to international peers, the initial assessment does not in our opinion fully capture unfavorable supply and demand dynamics for the housing provider, and vacancies are typically in excess of 8%.
*The symbols "[" and “]” denote the inclusion of the first and last data point in the range, respectively.

Management And Governance

42. The management and governance assessment is a key component of our analysis of a housing provider's ERP. Our assessment would take account of the housing provider's overall strategy, its financial policies, long-term planning, and the level of management expertise, in particular in managing risks. Our assessment also measures the quality of oversight and direction of the housing provider's board, executive team, and functional managers.

43. Our analysis of management and governance is qualitative. We assign an initial assessment ranging from '1' to '5', based on our assessments of the individual subfactors described in table 6. Our initial management and governance assessment would typically reflect the rounded average of the four subfactor assessments. However, we may weigh subfactors differently if we view a particular subfactor as more significant.

44. Table 6 depicts typical characteristics of each subfactor assessment for '1', '3', and '5'. For each specific subfactor, to receive an initial assessment at a given level, a housing provider should typically have all of the characteristics detailed for that level. The determination of '2' or '4' would generally result from our assessment of the relative strength of the issuer within the range of what is listed under '1' and '3' or '3' and '5', respectively.

Table 6

Assessment Of Management And Governance
1 3 5
Strategic planning process Evidence of strategic plans that contain specific operational goals with clear measure of achieving those goals in place. Timely and detailed financial and activity reports and solid accounting standards. Evidence of strategic plans but some aspects lack depth or specific operational goals. Measure to achieve goals is in our opinion unclear. Accounting and disclosure transparency are generally aligned with national standards. Very limited evidence that strategic plans exist, or we believe plans lack sufficient detail. Financial reporting is basic or incomplete and could be communicated with material delays. Poor accounting standards.
Consistency of strategy with operational capabilities and marketplace conditions Strategy is nearly always consistent with the organization’s capabilities taking into account marketplace conditions. Successful track record of marketplace leadership exists. Strategy is generally consistent with the organization’s capabilities, taking into account marketplace conditions. Strategy is inconsistent with the organization’s capabilities or marketplace conditions. Abrupt or frequent changes in strategy, unexpected acquisitions, divestitures, or restructurings in our opinion have occurred.
Management expertise and experience Management has considerable expertise, experience, and a track record of success in all of its major operating segments. Management has sufficient expertise and experience in its major operating segments. Management’s track record of success in carrying out its plans is in our opinion comparable with that of peers. Management lacks experience and/or expertise to fully understand and control many of its operating segments. In our opinion, the provider often deviates significantly from its plans.
Financial policies and risk management standards Management has successfully instituted comprehensive and above-standard policies that effectively identify, monitor, select, and mitigate key risks and has articulated risk tolerances to key stakeholders. Overall risk-averse policy. Management shows detailed, active, and risk-averse debt strategy and liquidity policies characterized by maintenance of reserves to meet cash flow needs. Limited use of derivatives. Robust management of covenant headroom. Management has a comprehensive set of standards and risk tolerances in place but may not have fully developed risk management capabilities. Management has financial policies that may not be in line with market conditions. Reserve policy exists but is less formal and not always in connection with the enterprise cash flow needs. Satisfactory management of covenant headroom. Management has no or few standards and risk tolerances in place or little risk management capabilities. Management has either no or a very poor and/or aggressive debt strategy; absence of effective reserves or liquidity policies. High refinancing needs not mitigated by liquidity sources; significant risk of covenants breach. Aggressive management of covenant headroom.

45. We may apply a negative adjustment to the initial management and governance assessment, for example if any of the following risks are present:

  • We believe governing board members or other governance officials have little relevant experience or are subject to conflicts of interest, or board member turnover prohibits effective governance. Alternatively, board members provide little oversight and are not involved in making or reviewing important decisions;
  • The housing provider has just begun (or will soon begin) a fundamental strategic shift in its missions or service offering that we believe increases the risks it faces; or
  • The housing provider has a history of regulatory, tax, or legal infractions beyond an isolated episode or outside industry norms. For example, it has consistently failed to comply with standards of care in maintaining the properties/stock. Similarly, we may apply a negative adjustment if a housing provider has breached a material internal policy.

46. Regardless of the subfactor assessments, however, we would assign a management and governance assessment of '6' when, in our opinion, we observe severe governance or management deficiencies, for example, management instability due to consistent turnover, absent management without capable substitutes to fill management positions effectively, or material deficiencies in maintaining the properties, such that required licenses may be at risk.

47. If our final management and governance assessment is '5', we would cap the SACP in the 'bbb' category. If our final management and governance assessment is '6', we would cap the SACP in the 'bb' category.

FINANCIAL RISK PROFILE

48. Three factors comprise the FRP assessment: financial performance, debt profile, and liquidity. We evaluate each of these from '1' (the strongest) to '6' (the weakest), and the final assessment results from an equal-weighted average of the three factors. We assess financial information over the following time periods:

  • Our financial performance and debt profile assessments typically capture a five-year average of the relevant metrics, comprising two years of historical data, the current year budget (or estimate), and two years of forecasts, with each year equally weighted. We may base our analysis on audited or unaudited historical data (including any adjustment that we deem necessary), depending on information availability in certain jurisdictions. The current year estimate and the forecasts are based on S&P Global Ratings' analysts own assumptions and expectations of the forward-looking financial standing of the housing provider, based on evolving economic and institutional conditions, management's policy statements, etc. Under exceptional circumstances, we may consider weighing differently the various years composing the five-year average to take account of the entity's specific conditions, such as transformation events (for example, an organizational restructuring, merger, or acquisition).
  • Our liquidity assessment generally considers a forward-looking 12-month time horizon.

Financial Performance

49. The financial performance assessment measures the profitability of a housing provider, which drives its ability to provide housing services (affordable and market rental activities, sales, care services, etc.), maintain its housing stock, and ultimately service its debt obligations. We would use EBITDA as a percentage of total revenues to derive the initial assessment of the housing provider's financial performance, which can be further adjusted by various qualitative considerations (see table 7).

Table 7

Assessment Of Financial Performance
EBITDA as a percentage of total revenue*
Ratio >= 50% [40%; 50%) [30%; 40%) [20%; 30%) [10%; 20%) < 10%
Assessment 1 2 3 4 5 6
Factors that can positively adjust the initial assessment above Factors that can negatively adjust the initial assessment above
In jurisdictions where it is legally possible, the ability and willingness exist to raise revenues or decrease costs, beyond what is contemplated in the forecast, resulting in the possibility of increasing EBITDA such that the initial assessment may be improved by at least one level Underfunding, which may lead to additional expenditure in the future (for example, pensions or payables)
Poor or deteriorating asset quality that we expect will lead to deteriorating financial performance, beyond what is contemplated in the forecast
*The symbol "[" denotes the inclusion of the first data point in the range, and the symbol ")" denotes the exclusion of the last data point in the range.

Debt profile

50. The debt profile factor measures both the housing provider's ability to cover financing costs and to repay debt from the most stable revenue flows. The initial assessment (see table 8) would be formed by debt-to-non-sales EBITDA (proxy of leverage excluding sales activities) and non-sales EBITDA interest coverage. We use non-sales EBITDA to measure leverage and interest coverage from the underlying social and public housing business segment.

51. Whereas the assessment of financial performance would be based on a housing provider's total EBITDA, our debt profile assessment would be based on non-sales EBITDA. This is because, in our view, an entity's profitability is best measured based on all revenues. Conversely, our debt profile assessment would not account for those activities that are cyclical and sensitive to market prices, and only measures an entity's debt repayment capacity against its most recurrent revenues, which provides a more relevant picture of structural debt sustainability, in our view.

Table 8

Assessment Of Debt Profile
Non-sales EBITDA/Interest (x)*
Debt/Non-sales EBITDA ratio* >= 2.5 [1.75;2.5) [1.25; 1.75) [1.0;1.25) [0.75;1.0) <0.75
< 10 1 2 3 4 5 6
[10;15) 2 2 3 4 5 6
[15;20) 3 3 4 5 6 6
>= 20 3 4 5 5 6 6
If non-sales EBITDA is negative, the assessment will be '6' before further adjustments below.
Factors that can positively adjust the initial assessment above Factors that can negatively adjust the initial assessment above
The presence of a sinking fund (that we expect will be used to repay debt when it matures). The magnitude of the adjustment would generally take the assessment to the level corresponding to an adjusted debt level. Expected significant additional borrowing requirements beyond the forecast period. The magnitude of the adjustment would generally take the assessment to the level corresponding to an adjusted debt level.
Aggressive debt structure.
The housing provider is approaching thresholds defined in debt-related covenants.
*The symbol "[" denotes the inclusion of the first data point in the range, and the symbol ")" denotes the exclusion of the last data point in the range.

Liquidity

52. Our liquidity analysis intends to provide a forward-looking, comprehensive assessment of an entity's liquidity position. It would be made up of two components, internal and external liquidity, and would be based on a two-step approach. The first step, which addresses internal liquidity, would be quantitative and would provide a measurement of an entity's available cash and expected cash inflows (sources) that will be available to cover all expected cash outflows (uses) over the coming 12 months. The second step would be qualitative, and would further inform the initial assessment by adjusting for various credit features, when warranted, as well as for our expectation of the entity's access to external funding (see tables 9 and 10).

Internal liquidity

53. Sources of liquidity include:

  • Forecast cash generated from continuing operations, if positive;
  • Cash reserves and liquid assets (adjusted to capture market value risk, where relevant);
  • Forecast working capital inflows, if positive;
  • Proceeds from asset sales (when confidently predictable);
  • The undrawn, available portion of committed bank facilities or bank lines that can be drawn;
  • Expected ongoing cash injections from a government or group member as appropriate; and
  • Other cash inflows (such as dividends from joint ventures).

54. Uses of liquidity include:

  • Forecast cash needed for continuing operations;
  • Forecast working capital outflows, if negative;
  • Expected capital expenditure;
  • All interest and principal payable on short- and long-term debt obligations coming due; and
  • Other cash outflows (such as investments in joint ventures).
Access to external funding

55. Market funding--bank loans, bonds, and commercial paper--can be an important source of enterprise financing, particularly in countries with liquid and mature banking or capital markets. In some countries, housing providers rely largely on a well-developed capital market for their funding, while in others, these entities rely mostly on bank loans. Furthermore, the legislative frameworks that housing providers operate under can affect their access to liquidity, either positively (for example, though special access to central government liquidity) or negatively (for example, through limitations on the use of debt instruments for liquidity purposes.)

56. Consequently, both country-specific and individual characteristics of a housing provider affect its access to external liquidity (and, accordingly, refinancing risk). Our analysis considers a housing provider's access to external liquidity sources on a forward-looking basis, and considers in particular:

  • The legal framework defining the provider's access to liquidity;
  • The general strength and diversity of domestic banks, focusing particularly on active lenders to the municipal/public sector;
  • The development of the domestic bond market in general and for social enterprises in particular; and
  • An individual provider's track record of market access and/or links to a diversified pool of banks, as well as any developments that we assess could modify the strength of its access to these funding sources in the future.

Table 9

Assessment Of Liquidity
Sources of liquidity over the next 12 months divided by uses of liquidity over the next 12 months*
Ratio > 2.50 (1.75;2.50] (1.25;1.75] (1.00;1.25] (0.75;1.00] <=0.75
Initial assessment 1 2 3 4 5 6
Factors that can positively adjust the initial assessment above Factors that can negatively adjust the initial assessment above
Exceptional access to external funding: We will revise upward the initial assessment by two levels Uncertain access to external funding: We will revise downward the initial assessment by two levels
Strong access to external funding: We will revise upward the initial assessment by one level Limited access to external funding: We will revise downward the initial assessment by one level
High refinancing needs
Aggressive use of financial investments
The housing provider is approaching covenant thresholds, and we assess that this presents a risk to access to external liquidity sources
Expected volatility in the liquidity ratio
*The symbol "(" denotes the exclusion of the first data point in the range, and the symbol "]" denotes the inclusion of the last data point in the range.

Table 10

Access To External Liquidity: Descriptors And Definitions
Assessment of access to external liquidity
Definition
Exceptional
We expect that the housing provider will maintain both:
Unquestioned access to deep and liquid capital markets or to a strong and diversified pool of banks at all times; and
Unrestricted and unconditional access to well-established and effective operating sources of liquidity from a local or regional government for which we assess access to external liquidity as “exceptional” under our local governments criteria*, or a central government, or a central government-owned bank or agency.
Strong
We expect that the housing provider will maintain either:
Sufficient access, including in periods of market dislocation, to well-established and effectively operating sources of liquidity from a local or regional government, for which we assess access to external liquidity as at least “strong” under our local governments criteria*, or a central government, or a central government-owned bank or agency; or
Sufficient access to a deep and liquid capital market or to a strong and diversified pool of banks, including in periods of severe market dislocation.
Satisfactory
We expect that the housing provider will maintain either:
Sufficient access to sources of liquidity in normal circumstances from a local or regional government (for which we assess access to external liquidity as at least “satisfactory” under our local governments criteria*), or a central government, or a central government-owned bank or agency; or
Sufficient access to the capital markets, or a strong and diversified pool of banks, in normal circumstances (that is, except for periods of severe market dislocation).
For housing providers that have no recent record of access to external funding, or have no debt (or close to 0), access to external liquidity is satisfactory if they operate in stable and deep capital markets, or have access to a strong and diversified pool of banks.
Limited
Either of the following conditions apply:
There are possible or intermittent legal restrictions on the use of debt instruments for liquidity management; or
The housing provider’s access to both capital market and bank financing is limited. We assess access to bank financing as limited even if the housing provider has generally good access to the banking system, if the pool of banks it has access to is not strong or diversified. We assess access to capital market financing as limited if there is limited development of the domestic capital market for housing providers.
Uncertain
Either of the following conditions apply:
There are legal restrictions banning the use of debt instruments for liquidity management; or
There is an undeveloped domestic capital markets for housing providers, and there is an extremely limited number of banks that lend to this sector.
*See Related Criteria And Research.
Capping the SACP due to liquidity risks

57. We would apply a cap to the SACP if we determine that liquidity is an overarching credit risk. We would generally reach this conclusion in cases where the liquidity ratio is below 1.0x after removing uncommitted capital expenditures from liquidity uses.

58. However, we would not apply a rating cap, regardless of the liquidity ratio, if we assess that a housing provider has "strong" or "exceptional" access (as defined above) to a government-backed liquidity source. We would also not apply a rating cap if we assess that the liquidity ratio has dropped temporarily, and that the housing provider has a credible plan to cover any deficit identified in the calculation of the liquidity ratio.

59. If we assess that liquidity is an overarching credit risk, we would cap the SACP in the 'bb' or 'b' category. In determining which cap to apply, we would consider:

  • The housing provider's access to external funding; and
  • The materiality and immediacy of the liquidity deficit as informed by our assessment of the level of the liquidity ratio excluding uncommitted uses

APPENDIX: PROPOSED GUIDANCE

60. This appendix provides additional information and proposed guidance related to our proposed criteria. We intend to publish this proposed guidance as a separate document following the publication of the final criteria article. For further information about guidance documents, see "Criteria And Guidance: Understanding The Difference," Dec. 15, 2017.

61. Examples illustrating the application of table 2, Determining The Anchor For A Housing Provider:

Example 1

62. The weighted-average assessments for a housing provider's FRP and ERP are 3.70 and 2.60, respectively. According to the ranges in table 1, the FRP would be adequate (4) and the ERP would be strong (3). According to table 2, the anchor outcome would be 'bbb+/bbb'. In this case, because both the ERP and FRP are at the stronger end of their respective ranges, a choice of 'bbb+' is a more likely outcome than 'bbb'.

63. If we assess that the housing provider compares favorably with peers with an SACP of 'bbb+', we may revise upward the SACP by one notch to 'a-' through our holistic analysis.

Example 2

64. The weighted-average assessments for a housing provider's FRP and ERP are both 4.00. According to the ranges in table 1, both the FRP and the ERP would be adequate (4). According to table 2, the anchor outcome would be 'bbb/bbb-'. For this example, the FRP includes a final debt profile assessment of '6'. The initial debt profile assessment is '6', based on the housing provider's debt to non-sales EBITDA ratio of 18x and non-sales EBITDA to interest ratio of 0.9x. In addition, we view the housing provider's debt structure as aggressive, as it is exposed to material unhedged currency risk, and our forecasts show that the housing provider is approaching debt-related covenants. We would generally apply two negative adjustments to the initial assessment to reflect these additional risks. As the initial assessment is already at the lowest level of '6', the additional risks are not captured in the debt profile assessment. As a result, we may select the lower outcome of 'bbb-' in our application of table 2.

Use of overrides

65. Among various overrides, the proposed criteria contemplate that we may assign an SACP that is one or more notches lower than the anchor, when rapidly rising or unexpected risks are likely to significantly weaken a housing provider's creditworthiness. Examples where we may apply such an override would include cases of imminent and significant external and domestic political developments, natural disasters, risks that large guarantees be called on, risks from large pension-related costs, or when a housing provider breaches any type of covenant.

ENTERPRISE RISK PROFILE

Industry Risk Assessment

66. The proposed criteria contemplate that we may combine different industry risk assessments, in situations where a housing provider is involved in other activities that we consider riskier than its primary rental activity. The most common example that we have seen historically, where such an adjustment would be applicable, is where a housing provider develops new properties for sale, rather than rental. Table 11 illustrates the application of our industry risk assessment for hypothetical housing providers with different shares of revenues from development for sale activity. In this case, the relevant industry risk assessments are those for social housing and for homebuilders. These industry risk assessments are determined according to "Methodology: Industry Risk," published Nov. 19, 2013. For a housing provider with an exposure between one-third and two-thirds to more than one industry, the industry risk assessment can be a midpoint, for instance at 2.5 when blending the industry risk assessments of '2' and '3'.

67. Table 11 shows an example of housing providers with various degrees of exposure to a homebuilders' industry (used to reflect the risk from property development for sale business).

Table 11

Illustration Of Industry Risk Assessment For Housing Providers Involved In Other Riskier Activities
Housing provider A Housing provider B Housing provider C
Five-year average share of revenues from development for sale activity Less than one-third Between one-third and two-thirds More than two-thirds
Applicable industry risk assessment
2 3 4
(industry risk assessment for social housing (‘2’)) (midpoint between the industry risk assessments for social housing (‘2') and homebuilders (‘4')) (industry risk assessment for homebuilders (‘4’))

68. We would generally assess the relative share of revenue from riskier activities over the same time period as we consider in our analysis of financial performance and the debt profile. One example of a situation where we may deviate from this calculation is where we believe that the calculation understates the housing provider's intended focus on the riskier activity. This may occur where volatility in the riskier activity results in a temporary fall in the five-year average ratio, although there has not been any shift of the structural strategic focus on the riskier activity.

Market Position Assessment

Regulatory framework and systemic support

69. The following examples illustrate the application of the regulatory framework and systemic support analysis, for three hypothetical housing providers with respective assessments of '1', '3', and '5'.

70. Housing provider A operates in a jurisdiction for which we assess the regulatory framework and systemic support as '1', based on the following characteristics:

  • The sector operates under a well-established, nationwide, legally defined policy mandate that entrusts the sector to provide affordable housing to families under certain conditions of resources;
  • Support to the sector is indirectly provided to the tenants with a large proportion of rents covered by timely and reliable government funding;
  • Additional direct operating and/or capital grants are available to the sector so that, all in all, the sector benefits from large and predictable governmental revenue flows;
  • Tight ongoing governmental supervision and reporting of key operating and debt indicators enable monitoring authorities to identify sectorwide or entity-specific deteriorating financial conditions, and to put in place remediation plans on a timely basis;
  • Access to external funding is provided by a well-established dedicated bank that covers most of the annual funding requirements of the sector;
  • There has never been any case, and we don't expect that there will be cases, of negative intervention from the government;
  • An assessment of '1' may also apply for a government-related entity that operates in a near monopolistic situation based on its policy mandate.

71. Housing provider B operates in a jurisdiction for which we assess the regulatory framework and systemic support as '3', based on the following characteristics:

  • The sector operates under a well-established nationwide, legally defined policy mandate;
  • Large indirect funding is available to the tenants, as well as direct operating and or capital grants, but provision is not timely and is subject to uncertain budget appropriation every year so that entities in the sector lack financial predictability, or
  • The sector has experienced significant cuts in government funding over time, which has led to an observable nationwide trend whereby some entities are moving into riskier business segments, such as developing assets for sale to compensate for decreasing government funding;
  • External funding is market based, either through banks or investors who benefit from tax incentives;
  • Ongoing monitoring is tight, although support is uncertain or untested;
  • We consider repeated sectorwide cuts in government funding or uncertain budget appropriation as mild forms of negative intervention.

72. Housing provider C operates in a jurisdiction for which we assess the regulatory framework and systemic support as '5', based on the following characteristics:

  • The framework and policy mandate is defined at a city level, which exposes entities to frequent political changes, hence policy shifts;
  • The city's direct funding to the sector has been unpredictable and subject to evolving political priorities;
  • Monitoring is inconsistent sectorwide and reporting is loose;
  • Access to external funding is market based.
Market dependencies

73. Our initial market dependencies assessment would consider a housing provider's vacancy rate relative to its domestic market. For this comparison we would typically consider economic vacancy rates, but may alternatively consider physical vacancy rates, in particular in jurisdictions where these data are more readily available.

74. Our definition of economic vacancies would typically include three categories: vacancies that occur during the initial lease-up of a newly constructed property; vacancies that result from turnover time between tenants; and vacancies that result from rehabilitation work on the property. We would not include as vacancies units that are offline for rehabilitation, if the housing provider continues to receive government rental subsidies for the vacant units throughout the rehabilitation program.

75. The proposed criteria allow for adjustments to the initial market dependencies assessment. In particular, we may apply an adjustment based on the number of units in a housing provider's portfolio. We would apply a negative adjustment for a concentrated portfolio (generally, fewer than 2,000 units) to reflect a housing provider's exposure to property-specific risks. Conversely, we would apply a positive adjustment for a diversified portfolio (generally, more than 50,000 units).

76. We may also apply an adjustment based on the geographic concentration or diversification in a housing provider's portfolio. For example, a housing provider whose property is mainly located in one city would be exposed to the socio-economic profile of such city, including potential relocation or restructuring risks of large employers or industries.

77. In some jurisdictions (for example, in Sweden), housing providers' average rent is typically very close to the average market rent, due to the effect of rental regulations. In such cases, in our application of table 5, we therefore assess the ratio of average rent to market rent as exceeding 90%, and apply the right-hand column. If a housing provider's vacancy rates are significantly lower than the overall market, we assign an initial market dependencies assessment of '3'. In determining the final assessment, we may then apply any relevant adjustments, as explained above.

78. The proposed criteria include a positive or negative adjustment to the initial market dependencies assessment, based on comparison with international peers. For example, while the initial assessment is driven by the housing provider's strength relative to that of national peers, we would apply a negative adjustment if the national market for social housing in that country is significantly weaker than elsewhere. We would reach this conclusion if low social housing rents in the relevant jurisdiction were driven by low demand for social housing, rather than by supportive policy.

Management and Governance Assessment

79. The application of the proposed criteria for the four subfactors included in the initial management and governance assessment is described below:

  • Strategic planning, such as the clarity and specificity of strategic plans on a multi-year basis. A provider receives a stronger assessment for its strategic planning process if it formalizes a strategic plan that has specific financial and operational goals for all major service areas and contains specific measures for achieving those goals that we perceive as consistent with the provider's capabilities and human capital in place. A management team that has a stronger assessment typically will have a transparent methodology for producing estimates, forecasts, and stress tests, and it will have verifiable material assumptions underlying the plan. A stronger assessment also requires the participation of senior executives and governance officials in the planning process. Conversely, a provider receives a weaker assessment if its process ignores major service areas or lacks specific financial and operational goals for many areas. In addition, a provider receives a weaker assessment if its plan lacks specific measures for achieving the goals for major areas or if senior executives do not participate in the planning process. Providers receiving an assessment of '3' include those with formal plans with specific financial and operational goals for most areas and specific measures for achieving those goals. However, the plans lack the detail associated with the stronger assessment.
  • Consistency of strategy with operational capabilities and marketplace conditions. A provider receives a stronger assessment if its strategy is consistent with its capabilities and that is cognizant of marketplace conditions. Also, the provider will have a record of market leadership and effective innovation (i.e. being among the first in its sector to respond to changes in market conditions successfully). A provider generally receives a weaker assessment for strategic consistency if it has implausible or overly optimistic strategies and projections that reflect weak internal planning capabilities or an insufficient grasp of challenges or opportunities. Typically, we would also assess negatively an entity that exhibits abrupt or frequent changes in business strategy or unexpected acquisitions, divestitures, or restructurings. However, although almost all mergers involve risk, well-executed acquisitions can make strategic sense and benefit providers. A provider with strategies consistent with its capabilities and that is cognizant of marketplace conditions typically receives an assessment of '3'. However, such a provider most likely fails to display market leadership or notable innovation.
  • Management expertise and experience. A provider receives a stronger assessment for management expertise and experience if it has demonstrated expertise in operating all major lines of business with an ability to grasp and successfully react to changing market conditions, as reflected in the provider's track record and in comparison with peers. Such a provider enjoys a track record of success in continuously and dependably executing its plans, excluding any events that, in our opinion, are unforeseeable. Alternatively, a provider receives a weaker assessment if management lacks the expertise and experience to fully understand and control its business. Such a provider has a track record of often deviating significantly from plans. A failure to acknowledge its risks or demonstrate an understanding of significant factors that could affect its cash flows also results in a weaker assessment. A provider that demonstrates either unexceptional expertise in operating its lines of business or an incomplete understanding of the significant risks in specific areas would receive an assessment of '3'. Such a provider usually has a track record of success in carrying out its plans, excluding any events that, in our opinion, are unforeseeable.
  • Financial policies and risk management standards. This subfactor addresses the housing provider's debt and liquidity policies along with comprehensiveness of its risk management standards and tolerances. We typically assess the degree of aggressiveness or conservatism of those standards and risk tolerances including for debt appetite and cash and reserves policies. In particular, a provider that has both prudent financial policies and high risk management standards receives a stronger assessment. Such an entity has successfully instituted comprehensive policies that effectively identify, monitor, select, and mitigate key risks and has articulated tolerances to key stakeholders. Providers that have no or few defined financial policies and no standards and risk tolerances receive weaker assessments. The assessment is '3' if a provider has basic financial policies, standards, and risk tolerances, but these may be less comprehensive than those of its peers across some of its operating segments. Such a provider may not have fully developed risk management capabilities.

80. The proposed criteria allow for adjustments to the initial management and governance assessment. In particular, we may apply a negative adjustment if we assess that a housing provider fails to comply with standards of care in maintaining its properties. We would reach this conclusion if the housing provider shows a history of deferred maintenance, or has consistently failed to comply with standards of care in maintaining the properties/stock without a specific one-time reason. This could reflect a deliberate position of the housing provider's management to relax the industry maintenance standards in order to compensate for a weaker revenue stream, for instance. The absence of compliance with regulatory maintenance requirements set at a regional or national level could also weaken our opinion of the housing provider's management. Overall, we would also see this as negative in terms of operations management because underspending on the housing asset base could deteriorate the housing provider's market position and reputation as well as its financial performance on a structural basis.

FINANCIAL RISK PROFILE

Financial Performance Assessment

81. The proposed criteria use operating profits or earnings before interest income, amortized grants, interest expense, income taxes, depreciation and amortization, and asset impairment to calculate EBITDA. We capture all revenue and costs from housing provider operations. We consider as operating revenues rental and recurring property sale activities. We consider as operating costs ongoing maintenance and major repairs spending that are not perceived as housing stock improvement (that would otherwise be captured through investment activities). We include as recurring costs the capital expenditures associated with development for sale.

82. We exclude from our EBITDA assessment divestments that a housing provider could likely conduct as part of its asset management strategy.

83. Similar to our treatment for depreciation, we would also exclude any asset appreciation from our EBITDA calculation even if it was treated by housing providers as operating income.

84. We may also adjust a housing provider's historical EBITDA and total revenues for one-off events that we believe unduly distort the long-term average ratio.

85. The proposed criteria include a negative adjustment for underfunding. We would apply this adjustment, for example, where we determine that pensions are underfunded, which would lead to additional expenditure in the future. In particular, we may consider in this determination situations where actual funding has been structurally below actuarial determined contributions to such an extent that the initial assessment may have been different; or the entity may have to catch up with pension-related spending in the future to bring funding levels back to balance, and/or amortize accumulated deficits, so that the initial assessment may be different in the future. We would also apply this adjustment where payables are accumulating in such proportion that we consider that the initial assessment would be different if costs were accounted for as coming due.

86. The proposed criteria include a negative adjustment to the initial financial performance assessment, if we expect that poor or deteriorating asset quality may lead to future deterioration in financial performance. We typically reach this conclusion if we assess that the asset quality could lead to lower revenue generation and/or higher expenses in the future.

Debt Profile Assessment

87. In our calculation of a housing provider's debt/non-sales EBITDA ratio, we include as debt other debt-related contractual obligations of the obligor. Therefore, debt includes direct debt and other fixed contractual obligations under operating leases or "take or pay" type relationships that, although not technically considered debt, are obligations nonetheless and are often associated with capital financing. Operational contractual obligations, including those for pensions and benefits, are not included.

88. The proposed criteria allow for adjustments to the initial debt profile assessment. In particular, we may apply a negative adjustment if we expect that a housing provider will face increasing borrowing requirements in the future. We would apply such an adjustment if we expect that the increased indebtedness would be sufficiently material to weaken/lower our initial assessment. Examples of situations where we may apply such an adjustment include housing providers with:

  • High future funding needs;
  • A loss-making sales activity, which may lead to additional borrowing requirements;
  • A risk of significantly increased indebtedness resulting from contingent liabilities associated with joint ventures, or similar off-balance-sheet activities.

89. Contingent liabilities represent exposures that have yet to become an actual obligation, but could do so upon the occurrence of other events. Globally, the most common contingent obligations include the following:

  • Subsidiaries and joint ventures: An enterprise may incur a contingent risk from providers in which it owns stakes. This risk is sometimes formalized by an explicit guarantee to provide support, but it can also be an implicit risk derived from the enterprise's less binding commitment to provide support. The risk from such relationships depends on the supported entity's credit quality and the relative size of its debt compared with the size of the enterprise's budget.
  • Litigation: Enterprises increasingly face a variety of litigation, linked, for instance, to environmental considerations. When these risks are not covered in the provider's budget through a provision or budget allocation, they represent a contingent liability. It is very difficult to assess these potential liabilities. As a result, the assessment typically evolves through discussions with the enterprise's senior management and progressions of the court proceedings.

90. The proposed criteria also include a negative adjustment where we assess that a housing provider's debt structure is aggressive. For example, we may apply such an adjustment if a housing provider's debt includes large portions of debt exposed to unhedged foreign exchange and/or interest rate risk. Typically, we would apply a negative adjustment of one assessment level, if more than 40% of a housing provider's debt is exposed to such risks. We generally consider that debt is exposed to interest rate risk if it is variable, or fixed only for one year or less. We would generally not apply this adjustment for cases where a housing provider has a significant portion of bullet maturity debt. Rather, we would apply a negative adjustment to the liquidity assessment to reflect the resulting refinancing risk.

Liquidity Assessment

Internal liquidity: liquidity sources

91.Cash reserves.   We include cash reserves that are either unrestricted, or that are earmarked for expenses coming due over the next 12 months (including debt payments) that are included among the liquidity uses.

92.Liquid assets.   Liquid assets include unrestricted assets that are available to cover debt service over the next 12 months. These assets should be able to be quickly liquidated without requiring deep discounts to their carrying value. Typically, housing providers hold short-term government bonds for this purpose. The proposed criteria contemplate that we may apply haircuts to the value of these assets, where we identify a market value risk. For example, if a housing provider holds listed equity securities as liquid assets, we would typically apply a 50% discount to the value of these securities in our calculation of available liquidity sources.

93.Proceeds from assets sales.   Revenue from asset sales excludes sales of housing assets already included in the cash generated from continuing operations (that is, those asset sales that we include in EBITDA, such as development for sale activities). In other terms, we capture capital revenue that result, for instance, from land sales or the housing provider's main offices.

Access to external funding

94. The proposed criteria consider two separate types of external liquidity sources:

  • Public sources, such as central, local, or regional governments;
  • Market or commercial sources, such as capital markets issuances and bank financing.

95. Notwithstanding that some aspects of external liquidity require an understanding of systemwide supply trends, the external access to funding is assessed at an entity-specific level. This means that the assessment is reviewed on an ongoing basis, and that credit conditions--whether evolving or stable--are expected to be a discriminating factor across entities, possibly even within the same country.

96. We would assess access to external liquidity as exceptional if stringent conditions are met regarding forward-looking access to both types of external liquidity. Housing providers with an exceptional assessment would have a historical track record of unquestioned access to markets/banks funding, as well as unrestricted/unconditional access to public sources of funding, including in periods of market dislocation, so that all funding requirements were met, including debt refinancing. We expect this to be a structural credit strength, hence our forward-looking view determines that both conditions would continue to be met in the future. We expect that we would only reach this conclusion rarely, and only for housing providers in highly rated sovereigns (typically found in sovereigns rated 'AA' or higher).

97. We may assess access to external liquidity as strong or satisfactory based on sufficient access to either public sector sources or market or commercial sources of financing. We generally consider access to be sufficient if those external sources can cover all funding and refinancing requirements over a forward-looking 12-month period. For a satisfactory assessment, we expect that the housing provider can maintain sufficient access in normal circumstances. For a strong assessment, we expect that the housing provider can also maintain sufficient access in periods of market dislocation. We expect to only assess external access as strong for housing providers operating in sovereigns rated at least 'BBB-'.

98. Our expectation of a housing provider's future access to public sector liquidity sources is informed by the provider's track record in accessing such liquidity sources, as well as (in addition to a government itself) the existence of a legally defined or well-established and operating public source of funding, such as a government agency, fund, or close financial arm.

99. Our expectation of a housing provider's future access to bank financing would consider the number and depth of the provider's banking relationships, and how they may become a more discriminating factor across entities under evolving economic and financial conditions. For an issuer to qualify for strong access, we expect that under market dislocation a large number of banks would continue to be willing to cover all of its funding requirements, in contrast to other issuers for which we would expect that the range of financing options would materially narrow under the same economic conditions.

100. Our expectation of a housing provider's future access to debt capital markets is informed in particular by the following factors:

  • We would generally assign a strong assessment for a regular benchmark issuer, with a track record of sufficient access to capital markets;
  • We would generally assign a satisfactory assessment for an issuer that has a track record of market access in normal times, but uncertain or untested track record of access in periods of market dislocation. We would also assign a satisfactory, rather than strong, assessment for a housing provider that issues bonds infrequently, or whose issuances are of limited size.

101. Our forward-looking analysis of a housing provider's access to capital market and bank financing also considers factors that could affect an entity's perception on the market. For example, we may conclude that a provider's future market access may deteriorate, and therefore would likely not assess market access as strong, in the following cases:

  • A housing provider begins to manage liquidity more aggressively, as evidenced by a change in internal policy or a drop in its liquidity ratio below its longstanding historical level;
  • We expect a change in a housing provider's policy role, or a shift away from its public purpose mission.

102. For the purpose of our assessment of a housing provider's external liquidity sources, we consider public sector funding agencies, which are not central government agencies, as equivalent to commercial banks, and therefore as commercial sources.

Other adjustments to the initial liquidity assessment

103. The proposed criteria include a negative adjustment to the initial liquidity assessment for housing providers with high refinancing needs. We would generally apply this adjustment if an entity has significant bullet debt maturities coming due in two to three years. We would generally not apply this adjustment for maturities coming due within 12 months, as these are already captured in the initial assessment through the 12-month liquidity ratio.

104. The proposed criteria also include a negative adjustment to the initial liquidity assessment, in situations where we expect volatility in the liquidity ratio. For example, we may apply such an adjustment for a housing provider that engages in more volatile operations, such as development for sale activities. We may also apply this adjustment if there are changes in a housing provider's investment plans that result in a temporarily overstated liquidity ratio and initial liquidity assessment.

Capping the SACP due to liquidity risks

105. The proposed criteria apply a cap to the SACP, if we assess that liquidity is an overarching credit risk. It also contemplates that a housing provider's access to a government-backed liquidity source, or credible plan to cover any deficit identified by a temporary drop in the liquidity ratio, may mitigate liquidity risk. We would not apply a cap to the SACP due to liquidity risk:

  • If the housing provider benefits from access to well-established and effectively operating public sources of liquidity, as defined in the "strong" assessment in the proposed criteria and above, and we expect this access to continue regardless of the entity's low liquidity ratio; or
  • For housing providers with an anchor of at least 'bbb-', if we assess that the drop in the liquidity ratio below 1.0x is temporary, and that the housing provider has a credible short-term plan to secure additional committed funding needed to fully cover the liquidity shortfall at least three months prior to the funding need.

106. Where the mitigating factors listed above are not present, we would typically cap the SACP in the 'bb' or 'b' category. We would generally apply the higher 'bb' category cap, if all of the following conditions are met:

  • We assess the housing provider's access to external funding as at least satisfactory;
  • The liquidity ratio excluding uncommitted uses is greater than 0.75x when calculated over a 12-month period; and
  • The liquidity ratio excluding uncommitted uses is greater than 1.0x when calculated over a six-month period.

107. Otherwise, if any of these conditions are not met, we would typically cap the SACP in the 'b' category.

RELATED CRITERIA AND RESEARCH

Criteria To Be Fully Superseded
Related Criteria

This report does not constitute a rating action.

The proposed criteria represent the specific application of fundamental principles that define credit risk and ratings opinions. Once proposed criteria become final, their use is determined by issuer- or issue-specific attributes as well as our assessment of the credit and, if applicable, structural risks for a given issuer or issue rating. Methodology and assumptions may change from time to time as a result of market and economic conditions, issuer- or issue-specific factors, or new empirical evidence that would affect our credit judgment.

Analytical Contacts:Ki Beom K Park, New York + 1 (212) 438 8493;
kib.park@spglobal.com
Dennis Nilsson, Stockholm (46) 8-440-5354;
dennis.nilsson@spglobal.com
Abril A Canizares, London (44) 20-7176-0161;
abril.canizares@spglobal.com
Criteria Contacts:Olga I Kalinina, CFA, New York (1) 212-438-7350;
olga.kalinina@spglobal.com
Valerie Montmaur, Paris (33) 1-4420-7375;
valerie.montmaur@spglobal.com
Andrea Quirk, London + 44 20 7176 3736;
andrea.quirk@spglobal.com

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