Essex-based landlord’s finances expected to weaken due to disposal of high-margin assets

The landlord’s rating could be lowered if its strategy results in weaker financial and debt indicators than S&P anticipates. This could be the result of higher costs than currently forecast or a shift to more aggressive development of new homes.

On the other hand, the ratings agency could raise CHP’s rating if its management adheres to more prudent policies and operations that would result in keeping strong financial metrics, in conjunction with stabilising its debt burden and maintaining a solid interest coverage ratio.

In a release, S&P said: “The outlook revision reflects our view that CHP’s updated strategic decisions will result in limited debt accumulation and gradual strengthening of the interest coverage ratio, despite weaker EBITDA [earnings before interest, taxes, depreciation and amortisation] margins.”

In response to external operating pressures, the ratings agency highlighted that CHP has scaled back on its own development aspirations and engaged in asset disposals, which should contain the debt build-up.

At the same time, it projects that the association’s adjusted EBITDA will gradually recover on the back of rents increasing faster than costs in the coming years and relatively stable – although high – investments in existing homes.

This should support a gradual improvement in CHP’s debt metrics, S&P added. However, it is still forecasting that the landlord’s EBITDA margins will remain weaker than historically, partly due to the disposal of high-margin shared ownership assets.

CHP told Inside Housing that it has evolved its growth strategy by working in partnership with M&G, Octopus and L&G Afforable Homes to complement its track record of delivering new, affordable homes across Essex. The landlord said this strategy will result in more homes being delivered overall but slows the pace of growth on CHP’s balance sheet, improving financial metrics for debt and interest cover.

S&P said: “We continue to assess CHP’s management and governance practices as weaker than that of local rated peers. We think the ambitious development plan and over execution of its investment targets have in the past strained the group’s debt and interest coverage metrics. 

“In addition, CHP is entering into more complex activities compared with similar-sized social housing providers, in our view. These include developing housing for third parties, which might expose the group to counterparty or other external risk.

“However, we positively acknowledge management’s efforts to adjust its strategy and respond to sector and macroeconomic pressures. The group has now scaled back on its own balance sheet development, established early warning indicators on debt metrics, and expects to use the proceeds from asset disposals to limit debt increase.”

The agency added that it believes these measures will partially offset the risks related to debt metrics weakening. 

Paul Edwards, chief executive at CHP, said: “This is fantastic news for CHP as a business and the customers we support. A ‘Stable ’A-’’ rating supports our plans to push forward with our current strategy and acknowledges the progress we’ve made over the last 12 months despite a challenging economic environment. We remain well-placed to continue providing great homes and services for our customers and communities across Essex.”