S&P affirms A+ credit ratings for Wheatley and Cross Keys Homes

News22 May 2020Sarah Williams

Standard & Poor’s (S&P) has affirmed the A+ credit ratings of Scottish housing provider Wheatley Group and East of England-based Cross Keys Homes.

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.@SPGlobalRatings affirms A+ credit ratings for @WheatleyHousing and @CrossKeysHomes with ‘stable’ outlooks #ukhousing #socialhousingfinance

Affirmed A+ credit rating report for @WheatleyHousing as @SPGlobalRatings expects it to “remain resilient during the COVID-19-induced recession” #ukhousing #socialhousingfinance

COVID-19 will “strain profitability” in the short term at @CrossKeysHomes but EBITDA margins will remain above 30% of revenue, @SPGlobalRatings expects as it affirms A+ credit rating #ukhousing #socialhousingfinance

While the credit ratings agency referred in its reports to an expectation of some rental income loss during the current financial year as a result of COVID-19, the outlook for both ratings is ‘stable’.

In the updates, published yesterday (21 May), S&P referred to the strong liquidity of each provider, while individual strengths included the positive impact on Wheatley’s debt profile from the addition of Dumfries & Galloway Housing Partnership (DGHP) through a constitutional partnership last year.

Wheatley Group

S&P said that it expects the 63,750-home Scottish provider to “successfully navigate the uncertain environment created by the spread of the COVID-19 pandemic”.

It refers to the group having strengthened its liquidity last year, while Wheatley’s size and scale “puts it in a good position to withstand unexpected shocks, in [S&P’s] view”.

S&P assumes a base case of rental income loss of around eight per cent for the current financial year (ending 31 March 2021), as arrears spike and some bad debts materialise. But it anticipates that Wheatley’s financial performance will “remain resilient during the COVID-19-induced recession largely because most of its tenants receive housing benefit or Universal Credit”.

Following the partnership with DGHP, completed in December 2019, voids are expected to remain below one per cent, “which is lower than the two per cent normally observed in the sector”. Gross arrears in financial year 2020 are expected to fall to 4.8 per cent from 6.8 per cent, but increased unemployment as a result of COVID-19 could increase arrears in the future.

Lower quality of assets at DGHP means that investment in existing assets is expected to “increase substantially” as a result of the partnership, with capitalised repairs expected to double to £44m in 2023 from £22m in 2019.

S&P noted that the increase in spending will ensure that Wheatley retains strong asset quality – “a rating strength”.

S&P expects debt stock to increase despite the reprofiling of development, as Wheatley “partially debt-funds development”. Debt will peak at around £1.59bn in 2023, S&P expects, but strengthening EBITDA is likely to see adjusted debt to EBITDA fall to around 14x in 2023, from a high of 17x in 2018.

£158m of cash and £313.5m of undrawn facilities support a strong liquidity position at Wheatley, with S&P expecting liquidity sources to cover uses threefold over the next 12 months.

Wheatley Group chair Alastair MacNish said the A+ (stable) rating underlined the group’s ongoing strength, resilience and agility. “At a time when the whole world is facing unprecedented challenge, this rating confirms our continuing ability to provide excellent services and invaluable support to our customers in the most difficult of circumstances.

“I believe this will consolidate our reputation as an extremely efficient, well-run organisation that is highly regarded across Scotland, the UK and Europe as a tremendous force for good.”

Cross Keys Homes

For 11,533-home provider Cross Keys Homes (CKH), S&P said it anticipates that a short-term increase in arrears during the COVID-19 pandemic, combined with a higher cost base and additional investment in existing properties, will “strain profitability”, meaning that adjusted EBITDA margins will be lower than previously expected over the three years to March 2023.

However, it still expects average EBITDA margins to remain above 30 per cent of revenue during the period, with a dip to 30 per cent in 2021, from the 35 per cent estimated for 2020.

It noted: “The weakening of liquidity this year is likely to be temporary, as we understand more facilities will become available over the next two years.

“We still assess CKH’s management and policies as positive for the rating, underpinned by a prudent approach to debt and liquidity management.”

S&P noted as positive the association’s East of England location, where it is expanding from its base in Peterborough into surrounding towns. The report observed a “continuous strong need for affordable housing”, while a “social-to-market-rent ratio at just above 50 per cent, together with solid regional population growth forecasts at 0.7 per cent (higher than the national average), support the strong demand for CKH’s services”.

Revenue from traditional activities represents more than 75 per cent of total turnover at CKH, while the provider has set a target to deliver around 500 homes each year over the next five years, of which more than 40 per cent will be for shared ownership.

S&P said: “First tranche sales expose the association to market risk, which we view as potentially volatile and subject to economic cycles.

“Due to the strong demand for below-market-rate housing, CKH has established a strong track record of first tranche sales over the past three years, with margins exceeding 35 per cent. Nonetheless, we do not currently expect these market sales to exceed one-third of CKH’s revenue in the next three years, and this exposure is monitored through CKH’s risk management strategy.”

S&P also noted that a policy of leaving a large share of its development plan “legally uncommitted” means that CKH will be able to use the implied flexibility should profitability deteriorate.

Where available cash is concerned, it expects CKH to “secure and absorb” some funding from an additional revolving credit facility this year and, in 2021/2022, to issue £60m of the retained bonds from its November 2019 £100m tap of its original £150m 2014 ’green’ bond.

The issue rating on the £250m bond, through CKH’s funding vehicle Cambridgeshire Housing Capital (CHC) has also been affirmed at A+.

Commenting on the report, Claire Higgins, chief executive of CKH, said: “We are absolutely thrilled to have retained our A+ rating, particularly in such trying times. Our board, directors and employees across the company have shown exceptional fortitude to ensure we react with both prudence and agility to the ever-changing landscape in which we work.

“We are continuing to work hard to maintain our financial strength and stability to not only ensure the security of our tenants, but also to build the affordable homes that are desperately needed across the region while still providing the support services and community investment we are so proud of.”