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 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 (strongest) to 6 (weakest). We apply integer values for all key factor assessments except industry risk and market position. Industry risk can be based on an unrounded average of two subfactors and, therefore, a midpoint outcome is possible. Market position is based on the regulatory framework an SHP is operating under and our view of their market dependencies--including issuer-specific features that complement industrywide systemic regulatory risk factors that shape an entity's position in the relevant market.

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 the score does not lead to a change in the rating in all cases, a change in the rating is also not 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 Feb. 29, 2024.

Industry Risk

We typically assess SHP's industry risk as low risk '2', with only six of our rated entities having an industry risk assessment of '3'. This indicates 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 six 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, 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 that these factors 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', which has remained stable since November 2023, and the ratings are at the low end of those in our portfolio, at 'A-' or below. At the same time, 29 SHPs, or more than 45% of our portfolio, have a positive assessment of '2', and of these, we rate 23 'A+' or higher.

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 about 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%, hence a '5' score. 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 an 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 17x or below (below 15x in March 2023) and adjusted nonsales EBITDA interest coverage of close to 4x on average (above 5x in March 2023). This indicates a '2' debt profile assessment.

The ratios gradually deteriorate to about 26x and 1.2x, respectively, indicating an assessment of '5' on average for entities rated 'A-', with further slippage to more than 35x and less than 1x for entities in the 'BBB' category, with the score edging lower to '6'. 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. This is offset by strong ties with their respective government or local authority, which either provides ongoing liquidity support, or would likely provide extraordinary support if needed. 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

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• Regulatory Framework Assessment: Social Housing Providers In The U.K. Benefit From Strong Regulatory Frameworks, Oct. 23, 2023
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