S&P downgrades large HA’s credit rating

The ratings agency said in its report: “The downgrade reflects our view that Stonewater’s financial metrics are weakening.

“This is due to its rising cost base, driven by increasing investments in existing assets and inflationary pressures. The group’s elevated debt burden, to support its development of new homes, is also straining its financial metrics.

“We could lower the ratings if, over the next 24 months, Stonewater further expands its development ambitions, or if its cost base increases more than we assume in our base case. Under this scenario, we expect weaker debt metrics, with debt to S&P Global Ratings-adjusted non-sales EBITDA exceeding 20x on a sustained basis.

“Alternatively, we could revise the outlook to stable if Stonewater succeeds in containing both the pressure on its financial performance and new borrowings, such that the adjusted EBITDA margin and debt metrics improve in line with or faster than our forecasts.”

Nicholas Harris, chief executive at Stonewater, said: “The decision by S&P reflects the recent high levels of inflation and the rent cap. We are balancing the need to deliver more homes with continuing to provide services and support for our customers.

“While we continue to focus on our mission to provide more affordable homes and invest in existing homes to help tackle the cost-of-living crisis, we remain financially strong. It is good to see S&P highlighting Stonewater’s business model and liquidity as key strengths.” 

S&P said it forecasts that Stonewater’s adjusted EBITDA margins will weaken structurally to below 30 per cent, which is lower than the historical level of more than 35 per cent on average prior to 2021-22.

It said that it expects Stonewater to increase investment in its existing assets to make up for delays during the pandemic and for energy efficiency improvements.

S&P said that the social rent cap, in combination with higher costs, will continue to put pressure on its adjusted EBITDA in the near term.

This is similar to the reasoning behind the majority of the Regulator of Social Housing’s wave of viability downgrades from V1 to V2 in November and December.

Most of these were because of housing associations increasing investment in their existing stock that, coupled with inflation and interest rates, reduces their capacity to respond to adverse events.

S&P said: “Weaker adjusted non-sales EBITDA and new debt issuance to support Stonewater’s development plan will likely weigh on the group’s debt and interest coverage ratios in the near term.”

The credit ratings agency said it understands that Stonewater is scaling back its development of new homes but forecasts that the group’s capital expenditure will remain relatively high in the coming two to three years.

S&P said that the landlord will require additional borrowing to fund new development, which will put its debt metrics under pressure.

However, it said that Stonewater has strong liquidity and operates in a supportive environment where there is a moderately high likelihood that Stonewater would receive timely extraordinary support from the UK government in the case of financial distress.

The credit ratings agency said: “We think that Stonewater’s business model remains a strength as it provides a predictable revenue stream from low-risk and countercyclical social housing rental activities.

“We think that the demand for Stonewater’s properties will remain solid, supported by our estimate that its ratio of social and affordable rents to average market rents remains low.

“We consider that Stonewater’s management team and board of directors have adequate expertise to carry out the development plan and manage the main operations.”

This follows Moody’s downgrading the credit ratings of six housing associations as economic conditions hit the sector.