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Sanctuary handed ‘negative’ outlook by S&P after Swan rescue merger
Sanctuary’s financial outlook has been moved to ‘negative’ by credit ratings agency Standard & Poor’s (S&P) after completing its delayed rescue of troubled housing association Swan.
The revised outlook, from ‘stable’, reflects the risk that Sanctuary’s financial metrics could “structurally weaken due to higher than anticipated costs associated with the Swan integration” amid sector-wide cost pressures, S&P said in a new report.
However, Sanctuary retained its ‘A’ long-term issuer credit rating.
The 105,000-home landlord completed its rescue of Swan yesterday, with the Essex-based group joining it as a subsidiary.
Swan has fallen into severe financial difficulties as a result of problems with a string of high-profile development projects handled by its commercial subsidiaries. The organisation published long-delayed annual accounts yesterday which revealed a £130m deficit in its last financial year, due to a group impairment of £186.5m.
Swan itself was downgraded to a ‘BB-’ credit rating by S&P last October after the extent of its problems emerged.
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In its latest report, S&P said it expected to see Swan exit some of its “non-viable” schemes, while the agency predicted that the landlord and its new parent, Sanctuary, will scale back their development plans in a bid to keep debt down.
However S&P warned that Sanctuary taking on Swan will reduce its flexibility to “respond to any unanticipated cost increases” such as “higher-than-planned investment needs in both Sanctuary and Swan’s existing stock”.
Significant investment in Swan’s current housing stock is expected after it was found to have breached the regulator’s Home Standard last year. Problems were found around fire safety, asbestos management and water safety.
As a result, S&P said it expects Sanctuary’s margins to weaken in the next two financial years, before recovering to around 20%.
S&P said the ‘A’ credit rating reflected the fact that it thinks Sanctuary’s financial metrics will recover and the group’s history of rescuing distressed housing associations, most notably taking on Cosmopolitan in 2013.
The agency noted Sanctuary’s “experienced” management, which it said had built a “solid track record of absorbing housing associations”.
S&P said it believed that “thorough due diligence” had been conducted on Swan and that the business plan has “specific targets to strengthen Swan’s currently weak financial standing”.
However, the agency added: “We do not disregard that Swan’s current financial distress imposes challenges that could go beyond those already anticipated by Sanctuary through the integration process.”
The agency warned that Sanctuary’s financial headroom has “tightened”.
The report added: “We think it will be difficult to mitigate unanticipated inflationary pressures on [Sanctuary’s] cost base, potentially lower revenues particularly from development-for-sale schemes, or additional investments required on its existing stock.”
S&P noted, however, that demand for the group’s properties is expected to remain “robust”, helped by Swan’s focus on its core markets of London and Essex.
Sanctuary has been contacted for comment.
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