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S&P downgrades London housing association over fears financial performance will ‘weaken’
A 4,500-home London landlord had its credit rating S&P downgraded as the agency expects the association’s financial performance to “weaken” and question marks hang over its strategy.
Hexagon Housing Association, which manages homes in south-east London, has been moved from a ‘A-’ long-term rating to ‘BBB+’ by S&P. Its outlook has remained ‘stable’.
In a note, S&P said the downgrade reflects its expectations that “higher costs, partly because of inflation, will weaken Hexagon’s financial indicators more than we previously anticipated”.
The agency said Hexagon is scaling back on developing new homes, adding: “We consider that in combination with the ongoing program’s delays, Hexagon will see lower rental revenue than we had previously assumed.”
S&P also pointed to a “relatively large bond issue amid rising interest costs” which has led to a higher debt burden.
A year ago, Hexagon raised £250m through a bond issuance, using a newly established sustainable finance framework.
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“The group currently has a substantial amount of cash following the bond issuance, but we are mindful that this will diminish over time because of capital expenditure,” S&P’s note said.
The agency added: “We are uncertain about the implementation and effectiveness of the group’s financial and operational strategy over the medium term, and we consider that Hexagon has less financial and operational capacity than peers to absorb external shocks because of its relatively small size.”
Hexagon currently has a G1/V2 rating from the English regulator, having been downgraded for financial viability in January 2021.
S&P also flagged that the association’s spending on fire safety, added to higher operating costs, will hit its margins in 2023, despite being awarded money from the government’s Building Safety Fund.
However, it said the landlord’s plan to cut costs will “partly offset the current pressures”.
S&P also noted that it expects demand for Hexagon’s properties to remain solid, as its rent levels are “low”, averaging about 40% of market rent.
On the stable outlook, S&P said: “Hexagon is likely to be able to contain costs relating to investments in existing stock and that development of new homes will be contained such that the group’s debt metrics will marginally improve toward the end of our three-year forecast period, while liquidity remains strong.”
In a statement on its website, Hexagon said it was “not immune to the UK’s high levels of inflation, elevated interest rates and difficulties in the construction sector”.
It added: “We remain firmly committed to our existing and future tenants, the local community and the environment. Our residents are at the heart of our business: our investment in existing assets is critical and remains a key objective of our corporate strategy.”
Hexagon was named earlier this month by the Housing Ombudsman as one of a number of landlords that failed to comply with complaint-handling failure orders.
In December last year, the ombudsman also identified Hexagon as one of five organisations with “excessively high” maladministration failures.
Former Habinteg boss Sheron Carter took over as chief executive of Hexagon in June last year.
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