Moody's Investors Service EMEA Ltd, ("Moody's") has today assigned a provisional (P)Aa1 rating to the GBP3.5 billion Guaranteed Secured Bond Programme (the "Programme"), to be issued by PRS Finance Plc in connection with the management and delivery of the Housing Guarantee Scheme for the Private Rented Sector (the "PRSGS").
The assigned (P)Aa1 rating is based solely upon the unconditional and irrevocable guarantee of scheduled principal and interest on the bonds secured under the Programme to be provided by the Secretary of State for Communities and Local Government ("DCLG").
The PRSGS is intended to stimulate the building of new homes for the private rented sector across the UK. The PRSGS will provide government guarantees in respect of bonds issued under the Programme, the proceeds of which will be on-lent by PRS Finance plc to approved borrowers against private rented sector assets.
PRS Finance plc and PRS Operations Limited are both wholly owned subsidiaries of Venn Partners LLP. PRS Finance plc is a pure financing company that will issue the bonds and grant the loans. PRS Operations Limited is the beneficiary of the government licence to manage the PRSGS. PRS Finance plc will originate and underwrite the loans to borrowers and make credit decisions. Loans and bonds are expected to be of matching duration in tenors of up to 30 years.
Moody's has issued a provisional rating on the Programme to reflect the ratings likely to be assigned to bonds issued under the Programme. Upon a conclusive review of the final documentation, including a certificate from DCLG confirming that the bonds benefit from the guarantee in respect of the Programme, Moody's will assign definitive ratings to the Bonds. A definitive rating may differ from a provisional rating.
Today's assignment of a (P)Aa1 rating to the Programme reflects Moody's belief that the terms of the guarantee to be provided by DCLG will be sufficient for credit substitution.
Moody's notes that the Guarantee is effective in that it:
- expresses an unconditional and irrevocable commitment to pay due and unpaid scheduled principal and interest
- covers any amounts avoided or clawed back as a result of the insolvency of PRS Finance plc
- continues in force as long as the guaranteed instrument, as well as any insolvency-related "at risk" period and any insolvency process that extends past the maturity date under the bonds
- prevents DCLG from relying on defences to payment that would ordinarily be available to it as a guarantor under English law
A key element of achieving credit substitution is timely payment under a guarantee. The agency agreement in respect of the Programme sets out a mechanism to ensure that bondholders receive timely payment from DCLG in the event of a failure by PRS Finance plc to make payments in respect of guaranteed amounts.
As outlined in Moody's Special Comment "Q&A: State Aid Risk and the UK Guarantees Scheme", a potential risk facing bondholders whose debt benefit from UK guarantees is the potential for the guarantee to be prevented or unenforceable if the provision of the guarantee breaches European Union State aid rules. Moody's understands that the PRSGS has sought to comply with the European Commission's 2008 guidance on State aid and guarantees (the "Guarantees Notice"). The Guarantee has been structured to comply with paragraph 3.4 of the Commission Notice, which sets out the rules for a programme of guarantees.
Although the DCLG guarantee is a new product and therefore untested, in Moody's view the approach to structuring the guarantee appears sufficiently robust that the ostensible level of exposure for the bondholders to State aid risk is low enough not to constrain the rating.
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