10,000-home provider’s interest cover expected to remain low amid increased spend
Settle has been warned by a credit rating agency that its ‘aggressive’ approach to investment in new and existing stock could weaken its financial metrics.
The 10,000-home, Hertfordshire-based provider has been assigned a ‘BBB+’ issuer credit by S&P and a stable outlook. The rating means the agency considers Settle to have “adequate capacity” to meet its financial commitments but is “more subject to adverse economic conditions.”
S&P said: “Despite solid rent growth, what we view as management’s aggressive strategy to maintain large investments in existing stock, alongside its pipeline of committed development, will weaken the financial metrics.”
S&P said Settle’s debt metrics will remain weak as it increases debt to fund 300 new homes a year.
It said “Though we anticipate management will look to alleviate pressure by limiting its relatively high exposure to variable interest rates, we expect non-sales EBITDA interest cover to remain well below 1.0x through our forecast.”
It said Settle’s investments to improve energy efficiency and maintain stock quality are well above the association’s historical spending and will “depress” Settle’s financial performance with its EBITDA margin set to be below 20% through until 2026.
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However, S&P also said that Settle will benefit from strong demand for social homes and rent increases will outpace inflation. It said it believes Settle’s strong liquidity will support its operations.
Settle’s surplus for 2022/23 fell 19% from £13.5m to £10.9m, as its interest costs increased from £9.7m to £14.3m. Last year Settle built 278 homes, its highest ever number of completions.
The group spent £14m on planned improvements to existing homes in 2022/23, up from £8.3m in 2021/22 and £4m in 2020/21.
Gavin Cansfield, chief executive of Settle, said: “The BBB+ rating reflects the conscious decision we have taken during recent years at Settle to substantially increase our investment in existing homes, alongside maintaining our commitment to developing new affordable homes.
“Our credit rating reflects our commitment to progress this investment alongside our development pipeline, part of which is focused on delivering much-needed regeneration in some of our largest neighbourhoods.”
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