S&P downgrades Guinness Partnership over reduced sales targets and ‘weaker debt profile’
Standard & Poor’s (S&P) has downgraded its long-term issuer credit rating on The Guinness Partnership to A-, from A, citing a “weaker debt profile”.
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In its rationale, the agency pointed to a “substantial lowering of development targets”, from a previous plan to develop 20,000 homes over 10 years to a new aim to complete just 6,133 homes over the period.
“In our opinion, this significant change to the development plan – which could materially hinder Guinness’ future funding needs – reflects a lack of consistency in its long-term strategic planning,” the report said.
The agency noted that the provider’s new financial plan incorporates fewer outright and first tranche sales than last year’s, but that it maintains the provider’s increased levels of investment in existing assets.
While previously the agency had expected Guinness to generate 40 per cent of its total revenue from sales-related activities, it now forecasts sales exposure to average 12 per cent of total revenue, with a peak of 18 per cent in financial year 2022.
As a result, S&P has forecast that Guinness will generate “lower levels of cash, which weighs on its EBITDA interest coverage”.
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The agency’s forecast sees S&P-adjusted EBITDA interest cover falling to “just 1x” in the current financial year, before increasing slightly to 1.1x in the following year, 2021.
However it noted that the ‘stable’ outlook on the rating reflects a view that Guinness would manage its debt service obligations while successfully investing in its existing and new homes.
It added that the provider’s operations are now “less cyclical and more predictable than before”.
It said that the decision to reduce the level of sales in the development programme should strengthen adjusted EBITDA margins in the base case. Taking into account an increase in capitalised repairs, it expects EBITDA margins to average 20 to 25 per cent.
S&P said: “Guinness will require grant funding and debt to build the revised target of 6,133 homes over the next 10 years. Debt stood at £1.2bn in FY2019. Factoring in the receipt of about £150m of grant funding, we expect Guinness to increase debt by slightly more than £200m by FY2022.
“Although the lower level of sales reduces the level of poorer-quality earnings, it also reduces Guinness’ adjusted EBITDA levels.”
Where liquidity is concerned, Guinness continues to demonstrate a “very strong” position, S&P said, with undrawn facilities of more than £550m.
S&P has also made the ratings adjustment to A-, with a stable outlook, on the provider’s bonds of £250m due 2044, and £100m due 2037.
A spokesperson from the Guinness Partnership said: “S&P’s credit rating is a reflection of our significant planned investment in our existing homes, including our investment in building safety, as well as the new affordable homes we will deliver.
"S&P have commented that they, like us, are confident that we will deliver on our investment in new and existing homes and our debt service obligations.”
Update: at 13:00 on 28/01/2020 this story was updated to include a comment from Guinness.
Update: on 20/02/2019, S&P published a new version of its research update which amended the figure for Guinness’ revised development plan to 12,000-13,000 homes over 10 years. The updated report said that it "[incorporated] additional information and clarification provided by Guinness".
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