Riverside has Moody’s rating placed on ‘review for downgrade’ over One Housing merger

Moody’s added: “The merged entity will have a weaker credit profile than Riverside on a standalone basis.”

One Housing has faced difficulties for a while. In its last full year, its pre-tax deficit ballooned to £25.5m after rising fire safety costs, an impairment on a proposed housing development and the pandemic hit its private care homes business. In the previous financial year, the 17,000-home group reported a deficit of £8.6m.

In January the Regulator of Social Housing downgraded the G15 landlord to a G2 rating for governance, partly as it said that its decision-making had not been “consistently supported by accurate data”.

In the last financial year, the groups had a combined operating margin of 14 per cent and social housing letting interest cover of 100 per cent, compared to 20 per cent and 160 per cent for Riverside on its own.

But Moody’s said: “One Housing’s cost pressures, relating to fire and building safety, as well as its poor performance on market sales and care, will weigh on Riverside’s already-weak margins until expected improvement from fiscal 2024.”

As a result, Moody’s said it expects the merged entity’s interest cover to remain at 80 per cent for the next three years, which is “significantly below” its Moody’s-rated peers’ median of 140 per cent in the last financial year and below the A2-rating peer median of 160 per cent.

The agency also flagged One Housing’s “high” net debt of £890m, which it said will “increase Riverside’s leverage above our expectations before the merger”.

Moody’s also said that the new entity’s exposure to market sales is expected to be “high” at around 20 per cent of turnover from the 2024 financial year.

But it added: “Recent underperformance in both Riverside’s and One Housing’s market sales activity, with sales margins as low as one per cent for both entities, illustrates the uncertainty of market sales cash flows. The merged entity’s complex structure, business focus and increased risk appetite would be more consistent with lower-rated peers.”

However Moody’s said that some of Riverside’s strengths will benefit the newly merged group. “We expect the merged entity to retain some of the credit strengths of Riverside on a standalone basis, including strong debt metrics, gearing and debt-to-revenues, and strong liquidity position with enough funds to cover 180 per cent of the next two years of net capital expenditure,” it said.

The note added: “Besides, the merged entity will follow Riverside’s policies and processes, management practices that we view as stronger than peers. Riverside’s strong track record on driving efficiencies, including on previous mergers, make planned efficiency savings realistic and attainable.”

However, Moody’s concluded that it “could downgrade Riverside in case of merger, resulting in Riverside’s lastingly deteriorated financial metrics and increased risk appetite”.

In a statement to Social Housing, Cris McGuinness, chief financial officer at Riverside, said: “Riverside has always acknowledged that our Moody’s rating was at risk due to the proposed merger with OHG.

“However we believe the proposed partnership will, over time, be better and stronger with higher long-term operating margins and an even stronger balance sheet.”