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Credit ratings could remain ‘under pressure’ despite extra grant funding
A credit agency has said the UK government’s additional funding for social and affordable housing may not prevent around half the ratings in its portfolio from being put under pressure.
Credit ratings could remain ‘under pressure’ despite extra grant funding #UKhousingA credit agency has said the new funding for social and affordable housing may not prevent around half the ratings in its portfolio from being put under pressure #UKhousingThe analysis from S&P has suggested that grants will only cover part of the capital spending on new homes, while providers will still have to invest more in their existing stock.
At the Spending Review in June, the government announced a range of fresh funding for the sector, including £39bn for the Social and Affordable Homes Programme with a target of “at least” 180,000 social rent homes.
Despite the government’s funding commitment, a “push to increase investments in both new and existing homes” would increase the pressure on about half of the ratings in S&P’s portfolio.
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The recovery of the sector’s interest cover has been “more gradual” than expected, the agency said. Interest cover is used to gauge a provider’s ability to meet its current interest obligations on outstanding debt.
While S&P has an average ‘A’ rating for housing providers, their “intrinsic creditworthiness has weakened since 2021, and more ratings are now at the lower end of the A category”.
That said, S&P expects the sector’s interest cover to bounce back because “in aggregate, they will generally scale down their development ambitions to mitigate the financial pressure from investments in existing properties”.
The agency analysed four scenarios to test the financial capacity of the 41 social housing providers in its portfolio to both deliver new homes and invest in existing stock, assuming that grant will fund 20% of new development in each case.
Scenario one envisages a 20% increase in capital expenditure for development in 2025-26 and a 30% increase in 2026-27. The second scenario adds a 2% increase in operating expenditure in 2025-6 and 2026-27.
Scenario three combines the second scenario with rent convergence equating to the Consumer Price Index plus 2%, while scenario four combines scenario one with rent convergence.
S&P said scenario two could result in the portfolio’s average interest cover being lowered towards 1.0x by March 2027, down from the current base-case average of 1.2x.
“If we project both higher capex [capital expenditure] and operating expenditure, the average interest coverage ratio dips well below 1x, close to the level of the ‘BBB+’-rated providers,” the agency said.
“However, rent convergence, as modelled in scenarios three and four, could help mitigate this negative impact.”
In recent months, S&P has downgraded its outlook to negative for some social landlords and cautioned landlords to focus on containing their debts.
Thrive Homes was moved to a negative outlook by S&P over concerns that rising spending on new and existing stock would “weaken” the association’s financial performance.
Last year, Places for People also saw its outlook changed from stable to negative.
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