S&P lowers L&Q’s credit rating to BBB+ due to existing stock spending

“L&Q’s escalated need to invest in existing stock is a material change compared with our previous base case,” S&P found, before adding that the group’s strategy had shifted from “delivering an aggressive development plan” to investing in existing stock.

Although L&Q maintained a strong liquidity position and access to external liquidity, “increased spending on existing properties will hinder a recovery in debt metrics, despite lower debt and interest”.

This is likely to lead to adjusted EBITDA margins “materially weakening over the coming three years”.

S&P also lowered its issue rating to BBB+ from A- on the G15 landlord’s senior secured debt and on the £2.5bn senior secured and unsecured medium-term note programme.

The ratings agency said that its outlook for L&Q remains stable and that it expects the landlord will “balance its step-up of investments in existing stock with plans to deleverage, such that debt metrics will remain relatively steady”.

Looking ahead, S&P believes L&Q will “dispose of non-core business activities including some high-margin assets and use the proceeds to reduce its debt, thereby stabilising its debt metrics, albeit at a weak level”.

Waqar Ahmed, group finance director at L&Q, said: “In the absence of a long-term government plan for housing that delivers the funding our sector needs, L&Q has had to make strategic choices.

“Whilst we seek to maintain an A credit rating where it is within our control, our primary aim is to maintain financial viability whilst ensuring residents receive the quality homes and services they deserve,” he said.

Mr Ahmed said that L&Q had adapted to respond to “significant economic and regulatory challenges” in recent years while still “delivering robust financial results”.

“We have clearly communicated how we are delivering against our stated objectives to divert a greater level of expenditure towards our residents’ existing homes to address our strategic priorities of health and safety, quality of homes and improving services,” Mr Ahmed added.

“The projected cost to complete our development pipeline continues to reduce. Like all housing providers, L&Q is exploring opportunities to generate additional financial capacity to invest in affordable housing including our stock rationalisation programme that seeks to divest of some homes outside our core strategic areas of Greater London and Manchester.”

The housing association reported a post-tax surplus of £147m for the 2023-24 financial year, up 268% compared to the £40m it recorded in 2022-23.

Its operating surplus, which excludes some one-off payments, more than doubled from £162m to £366m.