Swan Group posts £130m loss as impairments approach £140m

Losses and impairments

 

The group accounts for Swan show that operating loss from development activities was £114.3m during the year, while social housing activities also generated a deficit of £14.7m after an impairment figure of £36.9m.

 

At the centre of the impairments are the group entities responsible for constructing most of Swan’s schemes, including the subsidiary, Swan Commercial Services, that operated the group’s original modular factory and a second it had begun to develop.

 

Both factories are now being decommissioned, with production having ceased and employees “redeployed where possible”. A provision of £12m is made to cover the obligations of the lease for the second factory for the remainder of the term, contributing to a £16.6m impairment on that manufacturing site (estimated at fair value, less cost to sell).

 

Capital commitments 

 

The report outlines that a “detailed strategic review” has led the group to refocus on “core operations and core development schemes, moving forward”.

 

This contributed to a more than halving of capital commitments during the year, to £119m in 2022, compared with £267m in 2021, and consequently to the need to review the impact on impairments across its schemes.

 

“It is clear that there have been serious failures of internal controls and governance oversight”

 

In her chair’s note, Pat Billingham wrote: “It is clear that there have been serious failures of internal controls and governance oversight relating to business planning, risk, control and assurance and the effective management of those issues leading to the current position.

 

“In response, the board has been focused on seeking solutions and securing the future for our customers and staff. We have gained some understanding of how we got to the present situation as we have worked through the solutions, and we have taken immediate remedial corrective action to manage risks and secure the future.”

 

Impact on the parent association

 

Losses arising from impairments and provisions against “onerous contracts” within Swan Housing Association (Swan HA) and its development subsidiaries totalled £205.8m, including £55.3m for a “prior period error”.

 

These impairments and provisions translated to a £186.5m loss to Swan HA as the registered parent (across 2021 and 2022), after reserves of £19.4m held by the subsidiaries were taken off.

 

The association consequently recorded a deficit before tax of £169.6m in 2022, on turnover of £73.7m. That compares with (restated) 2021 figures of £28.4m surplus before tax, and £101.4m turnover.

 

As the registered parent, Swan HA owns a number of group vehicles, including the development company Swan New Homes, build contractor Swan Commercial Services Limited, and treasury vehicles Swan Housing Capital and Swan Housing Finance Limited. It also jointly owns a number of other development and regeneration entities.

 

Commercial subsidiaries Swan Commercial Services and Swan New Homes, which are financed by the housing association, led to the bulk of the impairments recognised in regard to development schemes and the modular operations.

 

The HA released loans owed to it from these subsidiaries amounting to £97m, in the year to 31 March 2022. Meanwhile, a further £52.6m of losses that were identified in the two subsidiaries after year-end have been provided for in the association’s financial statements.

For Swan HA, impairments for the 2022 year total £131.2m, including £36.9m for the association itself, £49.6m for Swan New Homes and £44.7m for Swan Commercial Services – which constructed most of Swan’s schemes.

 

This intra-group approach to financing construction contributed in large part to Swan’s financial downfall, the report noted. “This meant that all the commercial risk involved in constructing these homes was held by the Swan Group rather than passed to contractors as is more common in the sector.”

 

Of the group’s development strategy itself, the report said this had been “too ambitious and stretching on the group’s resources and in some cases insufficiently focused on the provision of affordable homes”.

 

It added: “Ineffective management and reliance on third parties to resolve the situation has resulted in a loss of control. Increased development costs coupled with delays to sales have increased pressure on financial covenants. This has been appropriately reset in 2022, although some existing sites will take time to resolve with action plans in place over the next few years on existing development schemes.”

 

Customer safety

 

In March 2022, Swan self-reported to the RSH over safety issues and was subsequently issued with a regulatory notice in May concluding that it had breached the Home Standard.

 

Swan’s accounts emphasise that the association’s new board and executive are “especially focused” on customer safety and asset compliance, with a new health and safety committee established in April 2022 to improve oversight.

 

Key lines of focus include fire safety, legionella, asbestos, gas, electrical and lift management, it said.

 

Pervasive uncertainty

 

Meanwhile, in her chair’s note, Ms Billingham continued to sound a note of caution on the auditor’s confidence in the impairment figures, reflective of the “pervasive uncertainty” around these. She said: “The auditors have been unable to satisfy themselves on the accuracy and completeness of the impairment charge, including whether any elements of this charge should be recorded as a prior period adjustment.”

 

In a filing in October Swan Housing Capital, the group’s treasury vehicle, said that auditor Grant Thornton had highlighted during the previous month that it had “insufficient assurance on the level of impairment included in the 2021-22 accounts of £178.4m in respect of certain development schemes”.

 

It added: “In the absence of further evidence it would therefore issue a disclaimer audit opinion but is prepared to conclude that Swan HA remains a ‘going concern’ on the basis of a merger.”

 

Within the latest accounts, Grant Thornton writes that the group’s current management team has been “unable to provide evidence to substantiate the quantum and timing of the impairment charge” and any related liabilities. It cited the significant operational challenges impacting developments resulting from factors that include “changes to the group’s management team, changes to the building regulations, along with the impact of macroeconomic conditions”.

 

Renegotiating covenants 

 

The report notes that the risk management system had failed during the year to ensure a “timely response to emerging risks faced by the commercial subsidiaries and the consequential impact on lender covenants”. It also failed to ensure adequate scrutiny of asset compliance, the report adds.

 

At the beginning of financial year 2021-22, the association’s covenants included debt per unit and on-lending limits, the accounts state. Within the first half of the year, financial projections indicated that it would be “prudent to agree some wider parameters to bank debt covenants with the main banking partners and engagement with those banking partners was duly sought”, the report adds.

 

It notes that lender discussions during the year resulted in “favourable short-term changes to the debt per unit and interest cover covenants” along with temporary increases to the level of investment permitted in joint venture and subsidiary companies. “To achieve these changes we were, in some cases, required to increase the level of asset cover required as security for the loan.”

 

“Several risks have crystallised during the year, but also carry ongoing exposure which the new board and executive are managing”

 

As at 31 March 2022, the association was “compliant with all its covenants”, the report said. These concern net debt per unit, interest cover and asset cover.

 

However, the report acknowledges the previous failure on the part of the association to respond in a timely manner to risks emerging from its commercial subsidiaries and the resulting impact on lender covenants.

 

“Historically, a culture of risk management and response has not been well embedded at an operational level. Several risks have crystallised during the year, but also carry ongoing exposure which the new board and executive are managing,” it said.