Bromford plans £300m bond

News20 Apr 2018Luke Cross

Bromford has seen its sector-leading credit rating affirmed but its outlook moved to negative ahead of plans for a £300m bond issuance.

Moody’s affirmed the A1 rating on Bromford and assigned a provisional debt rating of A1 to the proposed issuance of long-term backed senior secured bonds, which is planned to be drawn in one tranche in 2019, with no retained element.

It said the negative outlook reflects the view that Bromford’s credit metrics “will decline to levels more closely aligned with A2 peers over the next few years”.

Moody’s said Bromford’s A1 rating reflects its “strong focus on the provision of social rented housing, a traditionally stable and profitable business which supports strong social housing letting interest cover (SHLIC) at 2.4x and cash flow volatility interest cover at 2.7x in FY2017”.

Bromford’s operating margin is one of the highest in Moody’s rated portfolio, at 40 per cent in the 2017 financial year. The agency also cited the organisation’s “strong practices and procedures, including its healthy liquidity policy, which has led to Bromford outperforming previous business plan forecasts”.

Moody’s pointed out that market sales revenues are set to more than double, and are forecast to represent 23 per cent of total turnover in 2019, up from 10 per cent in 2017.

It said the associated lower margins from sales are forecast to reduce the headline operating margin to 26 per cent.

It said: “As bond proceeds are planned to support [Bromford’s] growing development programme, financial metrics are forecast to weaken, with debt-to-assets-at-cost projected to increase from 35 per cent in FY2017 to 41 per cent in FY2019, and debt-to-revenues projected to increase from 3.4x in FY2017 to 4.2x in FY2019."

The new bonds are expected to be secured by a pledge on a portfolio of Bromford’s social housing or affordable rent properties, which may be valued at both existing use value – social housing (EUV-SH) at 1.05x and Market Value Subject to Tenancy (MV-T) at 1.15x.

Moody’s said it views this threshold of asset coverage as offering only limited enhancement for bondholders and as insufficient to lift the ratings of the bonds over that of the group itself.

Proceeds from the bonds will be used to fund the group’s growth strategy.