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Moody’s issues Brexit warning on L&Q’s credit profile
London’s largest housing association would see its credit profile weaken in the worst possible Brexit scenario, ratings agency Moody’s has warned.
L&Q, which manages 95,000-homes, has one of the highest exposures to market sales in Moody’s portfolio of housing associations, the agency revealed in March.
It has encountered significant financial volatility recently, with its surplus falling by 42% in what it described as a “challenging year”.
In a publication on Thursday, Moody’s detailed two stress tests it applied to L&Q. The first, which it applies to developers, involved an 8% reduction in sale prices, a 12% fall in sale volumes, a 40% drop in land value and 2% cost of inflation.
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The second used the circumstances described in the Bank of England’s scenario for a ‘disorderly Brexit’, which include a 30% reduction in sale prices and inflation of 6.5%. Moody’s added its own assumption of a 20% fall in sale volumes and a 50% drop in land value.
In the first scenario, Moody’s said, L&Q’s overall credit profile would remain resilient. In the second, however, the agency said that operating margins would turn negative over the three-year period it was looking at.
It added: “Despite social housing letting interest coverage and gearing levels remaining relatively robust in this scenario, it is likely that L&Q would break its interest coverage covenant of 150% without the implementation of mitigating actions.”
According to the agency, the fact L&Q is moving more towards affordable housing than market sales will help to mitigate against these risks in the future.
It also revealed that L&Q has made some changes to its processes, which will make it more secure. For example, Moody’s said, it has “moved from quarterly to monthly reviews of its forecasts and key risk tolerance metrics and performance”.
It has also changed its official liquidity strategy. Previously, its policy was to hold enough liquid assets to meet obligations for 15 months in case of a market downturn. It has extended this to 18 months.
A spokesperson for L&Q said: “We welcome Moody’s research and its findings, which recognise that L&Q is resilient, financially well managed, and in possession of a strong balance sheet.
“Our sales exposure and the accompanying stress testing is directly compared to our social housing peer group, and these findings come as no surprise. We are confident in our own stress tests, risk management strategies and management and governance frameworks.”
