Places for People downgraded over diversification ahead of planned £300m bond issue

The association’s rating was lowered from A2 to A3. It maintained a negative outlook on the rating, which reflects the possible impact of the vote to leave the European Union and the downgrading of the UK following the referendum.

Moody’s also assigned a provisional A3 rating to an anticipated £300m bond issuance - which it describes as ‘senior unsecured obligations’ - along with the group’s new affordable housing treasury vehicle Places for People Treasury. The group’s £1bn Euro Medium Term Note (EMTN) programme was similarly downgraded.

It comes despite Places for People being the only English housing association to avoid a ratings downgrade by Standard & Poor’s earlier this month, in line with that rating agency’s downward review of the UK sovereign rating.

Places for People has a range of businesses beyond housing for social rent, such as managing property, leisure centres and retirement housing, construction and energy services.

These activities form more than half of its turnover but only 17.5 per cent of its operating profit.

Moody’s said that such diversification could provide some insulation from government policy changes but required greater management and oversight.

The ratings agency said the group made 56 per cent of its turnover from non-social housing letting activities in 2016 and this was projected to rise to 64 per cent in 2018, compared to a peer average of 27 per cent in 2015.

It said the non-core businesses were less profitable than its social housing letting, which had a ‘very strong’ operating margin of 40 per cent in 2016, which meant the group’s overall operating margin was lower at 20 per cent.

Moody’s also said the expansion into activities with less predictable financial performance than ‘low-risk’ social housing lettings could make the group’s cashflow more volatile and expose it to new risks.

It said Places for People’s refinancing risk was ‘very high’, with 44 per cent of debt due within five years as of the 2015/16 financial year against an average for rated peers of less than 10 per cent. One of its £140m retail bonds matures in December 2016.

However, Moody’s said Places for People had enough cash and facilities in place to cover its cash requirements for the next 12 months including debt repayments. It also said debt repayments were planned in 2017 so the ratio of debt to assets was likely to decline.

Simran Soin, Places for People’s group finance director, said diversification had helped the group to increase its turnover and pre-tax profits by two thirds and 150 per cent respectively over the past five years.

He said:  ‘We are buoyed by the success of our diversification strategy and remain very confident in the strength of this approach in not only protecting our income streams during an era of austerity, but increasing them.

‘Our business model means that this successful diversification allows us to invest more money in the communities in which we operate. It has also been a key factor in enabling the group to triple its pipeline of new homes with plans to build 15,000 new homes in the coming years.’

Financials

The group’s 2016 accounts, published at the end of July, highlighted the role of diversification in the business.

Its turnover excluding joint ventures rose 9 per cent to £616.6m largely because revenue from non-social housing activities rose 31 per cent to £324m.

The group said this was partly down to contributions from housebuilder ZeroC, which it acquired last year, and contractor Allenbuild, which it bought for for £2.75m in 2016, and its business managing leisure centres.

Its construction and development business made a turnover of £98.8m, a 130 per cent rise on 2015, while its leisure centre business saw its turnover rise 11 per cent to £130.7m

However operating profits in non-social housing work rose much less dramatically than turnover at nearly 4 per cent to £21.7m. Profit from social housing lettings grew 6 per cent to £108.7m.

Overall the group saw a 22 per cent rise in its operating profit in 2016. Its pre-tax profit rose 43 per cent to £43.7m on a frozen GAAP basis, which provides a year-on-year comparison without the volatility created by new accounting standards, FRS 102.

Another indicator of the group’s growing diversification is that it now employs more people working in its leisure business (2,148) than it does managing housing (1,970).

*story updated on 27/7/16 to include reference to the planned bond issuance