S&P downgrades L&Q’s credit rating citing ‘sizeable’ need for investment in stock

S&P Global Ratings has lowered L&Q’s long-term issuer credit rating from A- to BBB+, citing the housing association’s large maintenance needs. 

The ratings agency said L&Q’s “sizeable investment needs in existing stock” would weaken its financial performance in the medium term and “constrain its financial flexibility”. 

These measures are to address fire and safety risks, energy efficiency and investments to ensure the group’s stock complies with the UK’s Decent Homes Standards. 

“In our view, the group’s strategy increases its reliance on fixed asset sales and external market conditions to execute its plans,” it said. 

It predicted that L&Q would “dispose of noncore business activities including some high-margin assets”, using the proceeds to reduce its debt. 

Housing Today recently revealed that L&Q was exploring the sale of its private rental properties and strategic land company. 

Speaking at an event last month in Leeds, chief executive Fiona Fletcher-Smith said the 109,000-home provider wanted to “put residents first”. 

The social housing provider later said that non-core activity was “under regular review” but that “no final decisions have been taken”. 

While S&P added that such a move would stabilize its debt metrics, “albeit at a weak level”. 

It said the outlook on its new rating was “stable”. 

“The stable outlook reflects our view that the group will balance its step-up of investments in existing stock with plans to deleverage, such that debt metrics will remain relatively steady,” it continued.  

S&P said it could lower the rating if the housing association’s control over costs becomes less efficient than currently projected, if tighter market conditions hamper its divestment plans or if there is a material change in the likelihood of “extraordinary support from the UK government”. 

It said it could raise the ratings if cost controls yield better financials than currently projected. 

Positively, it noted that the group maintained a strong liquidity position, with good access to external liquidity. 

L&Q’s group finance director, Waqar Ahmed, said the housing association had been forced to “make strategic choices” in the absence of a long term government plan to fund the sector.

”The housing sector has faced significant economic and regulatory challenges over the past few years including the 7% rent cap,” he said.

”We have adapted our business to respond to those challenges whilst delivering robust financial results”.

>> Read more: L&Q reports trebling of surplus – but this could be reduced by impairment charges 

He added that this year L&Q had entered new contracs for housing and finance management systems which would create operational efficiencies, and that the group was exploring opportunities to generate additional financial capacity, including a stock rationalisation programme that seeks to divest of some homes outside its core strategic areas of Greater London and Manchester.

”Whilst we seek to maintain an A credit rating 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,” said Ahmed.

”We have a clear plan to achieve this aim which we have already made significant progress against. We will continue to provide updates on our strategic and financial performance via our regular quarterly trading statements.”