L&Q credit rating cut as it revises down forecast surplus

Credit ratings agency Standard & Poor’s (S&P) lowered the rating of L&Q from AA- to A+ with a negative outlook on 31 October.

Yesterday the association told investors it now expected its surplus for the year to 31 March 2017 to be £270m – this is £11m lower than previously forecast.

In a statement to the stock exchange, L&Q said delays in development handovers on 281 units, and a dampening of demand for high-end sales in prime markets and joint ventures had made sales slower than expected.

However group finance director Waqar Ahmed said L&Q had limited exposure to prime markets and was monitoring local markets and economic conditions. He said: “We believe that L&Q’s robust approach to risk management, governance and performance management provides L&Q with the confidence to adapt to any potential challenges that we may face.”

The association said its surplus after tax for the financial year to date was down 4% at £122m on the same time a year earlier. There was a £2m fall in the value of one scheme held as investment property and an £8m rise in interest and finance costs. Its operating surplus, which does not include those figures, was up 1% at £145m and turnover rose 6% to £416m.

Its fair value position on standalone interest rate swaps was -£207m, down from -£163m.

S&P cut L&Q’s credit rating because of its dependence on outright sales, shared ownership and private rent which could be affected by increased volatility.

S&P’s report said: “While we understand the strategic reasons for increasing development for sale, we continue to view such activities as more cyclical. They are sensitive to general business cycles, broader macroeconomic conditions, residential property valuations and income growth in an area. In our opinion, this potentially more volatile stream of income reduces the quality of earnings for a housing association.”

However S&P said L&Q had a strong financial profile, proactive management and well-established risk mitigants such as proven ability to switch tenure types.

Mr Ahmed said: “While we understand this decision, we believe that L&Q’s robust approach to risk management, governance and performance management ensures that L&Q is best positioned to meet those potential challenges. L&Q’s mission and corporate strategies continue to remain valid and our vision to contribute to the structural shortfall in UK housing will be enhanced through additional assets and expected synergies from our planned merger with East Thames Group.”

S&P earlier this week warned of a more ‘volatile’ housing association sector, as associations look towards ‘non-traditional’ activities, such as building homes for market sale, to boost income.