S&P downgrades large North East provider over anticipated economic impact of COVID-19

S&P chiefly attributes the increase in arrears over the past two years to a “threefold increase in Universal Credit claimants”, but it anticipates that arrears will remain relatively high as a result of the economic impact of COVID-19.

It added: “On the positive side, vacancy rates have remained very low, even compared with peers and despite slight increases caused by unexpected maintenance of the stock acquisition in May 2018.”

S&P said that following the anticipated economic recession in the UK caused by the coronavirus outbreak, it forecasts that Karbon’s S&P-adjusted EBITDA margin will reduce to 25 per cent for financial year 2021, down from the 30 per cent estimated for 2020.

“This temporary dip in the margin follows our expectation that a share of rents from self-paying tenants will come under pressure,” S&P said. “However, we expect that Karbon Homes’ flexibility to boost its performance will remain limited, despite being able to increase rents from 2021, EBITDA will be balanced by higher capitalised repairs and anticipated lower margins from non-traditional activities.”

S&P said that Karbon Homes has “moderate levels of debt”. Referring to its refinancing programme in 2018/19, which included issuing the £150m public bond, S&P said the group had effectively reduced the cost of debt, and had locked in fixed rates and cut the average interest expense.

It added: “We anticipate interest coverage to remain robust, even in FY2021, where lower EBITDA would reduce interest coverage to about 1.8x from 2.2x. Therefore, considering this temporary pressure, we expect adjusted EBITDA to average about 2.1x during FY2021-FY2023.”

Commenting on the downgrade, Scott Martin, executive director of resources at Karbon Homes, said that the provider’s 30-year business plan and strategy would not be impacted.

He said: “Despite the change in our rating we are pleased to have maintained an investment grade, and with very strong liquidity, Karbon remains in a robust financial position.

“Whilst we are naturally disappointed, we understand the external factors S&P has highlighted regarding the impact the coronavirus pandemic is having on the North East economy, our main area of operation.

“We have robust business continuity plans in place for events such as this and undertake regular stress-testing for a range of scenarios. Our dedicated teams have successfully maintained essential services to customers throughout this period whilst also continuing to provide vital advice and support.

“Our investors consider us an attractive prospect because of the strong demand for social housing in the North East and Yorkshire and we are well placed to support our communities in these challenging times.”

The downgrade comes after S&P last week affirmed the A+ ratings of two providers, Wheatley Group and Cross Keys Homes, with a ‘stable’ outlook for both.