Regulatory downgrade for London social landlord triggers credit rating cut

S&P said: “We think the group has persistently incorporated some optimistic assumptions on spend and savings in its budget and business plans, leading to consistent underperformance.

“Octavia’s financial team has seen high turnover over the past few years, reducing accountability and the ability to adequately execute plans. Historically, decision-making has been focused on social purposes rather than the group’s financial direction, which has constrained its financial capacity to absorb external shocks.”

The landlord’s EBITDA margins are also expected to be weaker than previously anticipated and well below 20% of its revenue. 

S&P said this was down to an old stock portfolio that requires significant investment, and at the same time, as it operates in conservation areas of central and west London, it is exposed to a higher cost base than its peers.

The need to invest in its existing properties, alongside spending on fire safety is limiting its flexibility to defer or cut discretionary spend at a time of high cost inflation, according to the ratings agency.

S&P said the negative outlook indicates the potential for a further weakening of Octavia’s performance, if its management failed to take prompt actions and adequately address cost pressures over the next 24 months.

The agency could revise the outlook to stable if the landlord’s actions have a positive impact on its creditworthiness that could lead to stronger financials and headroom against lenders’ covenants.

In response to the concerns identified in its report, S&P noted positively that the landlord had implemented staff cost reductions, scaled back its development aspirations, and is targeting disposals of fixed assets, with the aim of reducing the debt-funding requirement. 

The landlord is still considered to have a strong liquidity position by S&P, which estimates that its cash, undrawn secured facilities and proceeds from fixed assets sales will cover capital expenditure, alongside principal and interest payments by about 4x in the next 12 months. 

A spokesperson for Octavia said: “This rating from S&P brings forward its already scheduled review of the organisation’s rating by just a few weeks and is an expected consequence following the RSH’s downgrade last week.

“While this update today from S&P is disappointing, we were pleased the agency has declared that Octavia has sufficient liquidity in place and recognised the group’s actions already taken, including a reduction in staff costs.”

The landlord also explained it is working on an improvement plan that is being updated in light of the RSH’s decision.  

The spokesperson added: “As S&P themselves have stated, the demand for social housing provision in such expensive areas of London remains; our strong asset base of over 5,000 homes in the area is therefore well placed to serve our residents and the local communities.

“We remain fully committed to both our social purpose and in taking the necessary steps to return the organisation to a stronger financial position, so that we can continue to reach our strategic goals.”