S&P downgrades landlord over increased investment in homes

“We expect an overall weakening across FHG’s financial metrics because of the higher-than-anticipated costs and overspend on repairs.

“That said, we expect management’s solid strategic planning and prudent risk management, alongside very strong liquidity, will support a gradual recovery, though not to levels previously forecast.”

S&P also lowered to “A from A+ its long-term issue rating on the £270m bond issued in February 2019 by Futures Treasury PLC, the group’s funding vehicle set up for the sole purpose of issuing bonds and lending the proceeds to FHG”.

It said the landlord’s outlook on the A long-term rating remains stable, reflecting its view that “FHG’s management team will manage costs and utilise flexibility to limit further pressure from high investments in existing stock”.

The agency also expects the landlord’s liquidity position to remain “very strong”.

S&P said that it could lower the rating on Futures if management “adopts a more aggressive strategy that leads to financial metrics materially weaker than our projections”, such as interest cover below 1.0x on a sustained basis.

The agency said it would raise the rating if Futures contained costs, “such that S&P Global Ratings-adjusted EBITDA margins exceed and remain above 20%, with limited debt buildup and liquidity sustained at very strong levels”.

Futures owns and manages about 10,700 homes in the East Midlands and is currently graded G1/V1 by the Regulator of Social Housing. 

S&P said the landlord’s management was a “key rating strength”.

“We think FHG is managing risks and maintaining flexibility in its development plan to contain additional pressure on metrics and limit the need for new debt.

“We anticipate management will proactively secure grant opportunities, when possible, to support investments in existing and new homes,” it said.

As of 31 March, 60% of the social landlord’s stock was at or above an Energy Performance Certificate rating of Band C.

S&P said it was “on track” to meet its 2030 decarbonisation targets but expected spending, along with other cost increases, “will continue to hamper the group’s financial performance”.

Ian Skipp, group finance and resources director at FHG, said: “This change was not unexpected and we don’t believe it’s cause for concern.

“The rising costs of maintaining homes and meeting ever more stringent standards in the social housing sector are having an impact on all housing associations and Futures is not immune.

“At the same time, we have strategically decided to prioritise investment in our customers’ homes with ongoing programmes around new homes, improved sustainability and energy-saving measures and enhanced repairs and upgrade work. We are also doing more to support communities and struggling households.

“Our liquidity position remains strong and we’re pleased to see that reflected in S&P’s comments in their grading statement.”