Stonewater downgraded as costs rise

Developing housing association Stonewater has had its finances downgraded after a ratings agency said rising costs had “weakened” its “financial metrics”.

S&P said the 35,000-home association was also planning to rein in its development programme in response to the rising costs, with the ratings agency saying the downgrade was in part responding to fears over its ambitious 1,500 homes-a-year build plans.

S&P said Stonewater, along with its associated bonds and a fundraising vehicle Stonewater Funding PLC were all being downgraded from an A+ to an A rating, given Stonewater’s “increasing investments in its existing assets” and high forecast capital expenditure on new development.

S&P said the outlook on the organisation was “negative”.

Stonewater, in response said it was balancing the needs of investing in new build and its existing homes at a time of rising inflation, but that it was too early to say whether it was scaling back its build programme.

Stonewater built 836 homes in the last financial year, up 24% on the previous year, and has set out plans to increase development to as much as 1,500 homes-a-year in the current financial year.

S&P said it understood the association now “plans to scale back its development activities”.

Despite this, it said it forecast that the group’s capital expenditure “will remain relatively high in the coming two-to-three years.”

In Stonewater’s latest financial results, for the year to March 2022, it saw its surplus more than halve to £23.9m as costs rose. It and reaffirmed the 1,500-home build target for the current financial year, despite the rising costs.

S&P said it believed Stonewater’s “financial metrics are weakening”, as “a higher cost base due to rising inflation, investments in existing assets, and debt-funded development could put greater pressure on Stonewater’s financial metrics” than previously expected.

It said these problems would be compounded by rent increases kept substantially below the rate of inflation by the government’s rent cap.

While S&P said that around 40% of Stonewater’s capital expenditure remained uncommitted, giving it the flexibility to scale back the development of new homes, it said it still expected it to have to borrow more money to fund the homes it will build.

S&P said: “Although Stonewater has secured grant funding from Homes England, we forecast that the group will still require additional borrowings to fund new development. Together with our forecast of lower adjusted nonsales EBITDA in fiscal 2023 and fiscal 2024, we expect that the group’s debt metrics will come under pressure.”

The ratings agency added that Stonewater’s finances remained protected by a strong business model backed by “solid” rental demand, and said the landlord had “very strong” liquidity and adequate management control.

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, it is good to see S&P highlighting Stonewater’s business model and liquidity as key strengths.”

A spokesperson for the business added that “no decision has yet been made” on whether or not to scale back investment in development of new build homes.

Stonewater announced a deal to take over 550-home sustainable housing provider Greenoak in January, which it said would provide it with green building skills.