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Second ratings agency hands Sanctuary ‘negative’ financial outlook after Swan takeover
A second credit ratings agency has handed Sanctuary a ‘negative’ financial outlook following the completion of its delayed rescue of troubled housing association Swan.
Moody’s confirmed the negative outlook after a review it began in December, following news of the merger between the two landlords.
Sanctuary has maintained the financial outlook it was given towards the end of last year, and this new report said this reflects “the medium-term challenges posed by the business combination, including the execution of the remainder of Swan’s development programme and investment in its existing stock”.
This was in addition to what Moody’s described as the “overarching macro-economic challenges facing the sector, including high cost inflation, sub-inflation capped social rents, higher interest rates and a housing market decline”.
The 105,000-home landlord completed its rescue of Swan earlier this month, with the Essex-based group joining it as a subsidiary.
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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 around two weeks ago, 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, and Sanctuary was moved to “negative” by S&P earlier this month.
Despite Swan’s financial difficulties, Moodys said its rating was “underpinned by the favourable terms that Sanctuary and Swan have agreed with Swan’s lenders and bondholders, including waivers related to historical breaches of Swan’s lender covenants”.
In a stock market update in January, Swan revealed that it had convened a meeting of bondholders on its £250m publicly listed finance package agreement to agree a waiver on any covenant breaches.
This is because of its failure to deliver its audited financial statements, including its balance sheet and profit and loss account – a term of its deal.
Moody’s noted Sanctuary’s track record of amalgamating smaller housing associations, including those in financial difficulty, most notably Cosmopolitan in 2014. As a result, it believes the landlord has “sufficient experience and expertise to effectively incorporate Swan into its business and execute a turnaround in its performance”.
Swan’s impairment problems are centred around six development projects at Beechwood, Laindon, Watts Grove, Blackhorse Yard, Exmouth and Purfleet.
However, Moody’s considered Swan’s development programme to have been de-risked considerably, reducing its negative impact on Sanctuary.
The credit agency said its rating was unlikely to be upgraded, but could be changed to “stable” if Sanctuary was able to maintain relatively stable financial and debt metrics over the medium term.
It warned that a downgrade could occur for a number of reasons, including a weakening in operating margins and interest coverage ratios, and increases in debt levels beyond that currently anticipated.
Sanctuary has been contacted for comment.
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