Fitch downgrades two G15 landlords to A

L&Q

Fitch said that over the past three years, L&Q’s leverage metrics have remained high, driven by challenges from external macroeconomic pressures.

The credit rating agency said to regain financial resilience, the landlord has decided to continue its stock rationalisation programme, divest its non-core assets, and continue reducing investment in new developments.

“L&Q’s significant reliance on the sale of non-core assets exposes it to external market conditions,” Fitch said in its credit rating report.

“Additionally, L&Q will need to continue to invest substantial amounts in its existing stock to meet the government’s Decent Homes Standard, EPC C, and net zero requirements, which will weigh on its financials.”

Fitch said it expects the housing association to have “sufficient capacity” to cover these additional costs with £3bn factored in over 15 years in its business plan.

The credit rating agency said that L&Q has the flexibility to curtail some discretionary expenditure, or reduce spending on non-essential work, but this is not sustainable in the long term, and will likely increase future costs.

Waqar Ahmed, group finance director at L&Q, said: “Whilst we seek to maintain credit ratings where it is within our control, our primary aim is to maintain financial viability whilst ensuring residents receive the quality homes and services they deserve.”

He said L&Q has adapted its business with “a clear plan to achieve this aim”, which it has “already made significant progress against”, most recently via the sale of L&Q Estates.

“We remain committed to lowering our risk profile and we are pursuing a diverse number of opportunities to create capacity to invest in our existing homes,” Mr Ahmed said.

“We will continue to provide updates on our strategic and financial performance via our regular quarterly trading statements.”

This news comes after S&P Global downgraded its credit rating for L&Q in June from A- to BBB+ after concluding that “sizeable investment” in existing stock will weaken the group’s financial performance in the medium term.

The Hyde Group

Fitch said that Hyde’s leverage metrics have been high during the past two fiscal years, attributable to external macroeconomic pressures and sector challenges.

“Hyde’s net adjusted debt/EBITDA has been increasing in recent years, but we expect that it peaked in FY24 as a result of non-recurring expenditure related to fire and building safety costs,” Fitch said in its credit ratings report.

“Fitch stresses management’s expectations to achieve its rating-case scenario. We expect leverage to improve over the rating case as Hyde’s void disposal programme progresses. This is expected to reduce pressures from planned capex for development and debt for reinvestment in existing assets.”

Fitch said that Hyde continues to invest in the maintenance and improvement of its existing assets.

It added that the landlord continues to limit development risk by developing through partnerships and joint ventures.

Rod Holdsworth, chief financial and resources officer at Hyde, said: “We welcome this further endorsement of the long-term stability of the group, despite the challenges facing the sector.

“We have clear plans to invest sustainably in our customers’ homes and communities to improve outcomes, and to continue playing our part in tackling the housing crisis by building much-needed affordable homes.

“This commitment to continue delivering on the important priorities we share with our customers and partners is underpinned by our strong and stable financial position.”

A2Dominion

Fitch said that A2Dominion’s financial performance has “deteriorated” due to sector challenges such as building safety spend and energy efficiency reinvestment.

However, it added that the housing association aims to recover financial resilience by limiting future development, disposing of non-core assets and reinvesting efficiencies.

“We expect leverage to improve as these costs diminish,” Fitch said in the credit rating report.

Fitch added that on expenditure risk, A2Dominion has the flexibility to slow down committed schemes or defer uncommitted schemes, and to switch tenure from sale to market rent or affordable rent, supported by grant funding.

Tracey Barnes, chief finance officer at A2Dominion, said: “Fitch’s rating of A with negative outlook recognises that, against the continuing challenging macroeconomic environment, A2Dominion remains a good investment with a strong ability to meet its financial commitments.

“Our board is firmly committed to maintaining and building the organisation’s financial strength and, in parallel, is steering the organisation to fully deliver the voluntary undertaking and return A2Dominion to a compliant governance grade.

“The business plan shows substantial improvement in financial metrics over the medium term and the strong balance sheet provides flexibility and resilience in the face of continuing economic uncertainty.”