Bromford retains leading credit rating ahead of Merlin merger and plans to boost building by half
Bromford’s sector leading credit rating has been affirmed ahead of proposals for Merlin Housing Society to join the group and plans to increase overall development by half.
Moody’s confirmed the A1 rating with a negative outlook for Bromford Housing Group. It means the Midlands group maintains a leading Moody’s sector rating, alongside Riverside.
The agency said Merlin is a traditional social landlord with 8,500 units under management and “a strong focus on social housing letting and a record of achieving targeted efficiency savings”.
The agency did not explore the impacts of Severn Vale joining the group, with whom the parties are also in earlier merger discussions.
The merger will see Bromford remain as the parent of the group, with Merlin becoming a subsidiary, as part of a plan to “establish one of the largest housing associations operating in the Midlands and the West of England” with 39,000 homes.
A merged entity intends to scale up planned development by approximately 2,100 additional units to a total of 6,300 homes by 2022; an increase of 50 per cent on its previous development programme.
The agency pointed to Merlin’s “notable idiosyncratic strengths”, such as sourcing 94 per cent of turnover from stable and profitable social housing letting, very high interest cover ratios relative to the rated portfolio, and low levels of debt.
It said Merlin’s strengths “do not materially impact [Bromford’s] key metrics, due to its relatively small scale”.
But the combined business plan would improve the forecast operating margins for Bromford as a standalone entity, to 31 per cent in 2019 from a forecast 26 per cent, which is above median forecast margins for rated peers.
The merged group would also boost Bromford’s current unencumbered asset position, increasing borrowing capacity from £183m as at January 2018 as a standalone entity, to £282m upon the merger being complete, based on an Existing Use Valuation (EUV).
Securing continued MV-T valuations would further enhance the value of BHG’s unencumbered assets, it added.
Bromford’s negative outlook reflects its increased ambition.
Moody’s said: “While leadership has put in place sophisticated treasury policies to ensure adequate liquidity buffers are established, we note [Bromford’s] change in strategic direction incorporates increased development and market risk.”
The rating also takes into account challenges such as “implementation risk related to the establishment of a new coterminous board and changes to the executive team, alongside the roll out of a business transformation programme”.
The latter includes an upgraded group-wide IT system, and execution risk on the new entity’s development programme.
Over a third of the planned development will have market sales exposure, while increased debt will push gearing metrics to above rated peer levels and weaken debt-to-revenue levels.
Ben Taylor, finance director at Merlin, said the new organisation "will have the funds and the talent to deliver even more homes across our new expanded operating area".
He added: "We plan to invest £1.5bn over the next decade to develop 14,000 new homes.”
Bromford raised a £300m bond in April at one of the best spreads seen this year.
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