S&P upgrades Swan’s credit rating and downgrades Sanctuary’s outlook

Swan

Now, following the merger, it has upgraded Swan to ‘BBB+’, removed its issuer and issue credit ratings from CreditWatch, and has given the housing association a positive outlook.

The credit ratings agency called the merger “highly strategic” and said that Swan’s creditworthiness has strengthened.

This is because it considers that Sanctuary is highly likely to support Swan under almost all foreseeable circumstances and Sanctuary will work towards strengthening Swan’s standalone credit quality.

S&P said that it considers Swan a “highly strategic operating subsidiary of Sanctuary” and derives its issuer credit rating on Swan by notching down twice from the ‘A’ rating on Sanctuary.

The credit ratings agency said it believes the business and financial weaknesses that constrain Swan’s standalone creditworthiness are balanced by the “financial, operational and liquidity support” that Sanctuary provides.

It said that the business combination will seek to safeguard services to Swan’s tenants and communities, ensure Swan’s financial solvency and establish lender confidence in the larger group.

S&P said the combination will also seek to satisfy the regulator that the new group will have a governance grading of G1 and a financial viability grade of at least V2.

The credit ratings agency said that Swan’s outlook is positive because it anticipates that Sanctuary will support it through the integration process.

S&P said this view is supported by Sanctuary’s £50m loan to Swan to provide it with “additional liquidity”. Swan used the loan in part to refinance a £40m loan from its previously intended partner, Orbit, before those merger talks collapsed.

S&P also raised the issue rating on Swan Housing Capital’s £250m 2048 bond to ‘BBB+’, from ‘BB-’.

Swan Housing Capital was set up for the sole purpose of issuing bonds and lending the proceeds to Swan, and S&P views it as a core subsidiary of Swan, which has now become an operating subsidiary of Sanctuary Group.

S&P said: “In our view, Sanctuary’s credit profile is materially stronger than Swan’s standalone credit profile, and we think that Sanctuary is highly likely to provide extraordinary group support to Swan.

“We therefore consider Swan’s group status within Sanctuary to be highly strategic, and raised our long-term issuer credit rating on Swan to ‘BBB+’ from ‘BB-’.

“The positive outlook reflects our view that we could raise the issuer credit rating on Swan again if, as we anticipate, Swan is fully integrated into Sanctuary.”

Sanctuary

S&P also affirmed Sanctuary’s ‘A’ rating but downgraded its outlook from stable to negative.

The credit ratings agency said that it expects Sanctuary to “prudently manage” the integration of Swan into the group, which will allow its financial indicators to recover from the temporary weakening it anticipates within the next two years.

S&P said that Sanctuary’s management is “experienced and has built a solid track record of absorbing housing associations in financial distress”.

It said that Sanctuary’s liquidity position will remain “very strong” in the next 12 months and has strong access to the capital markets and could obtain additional funding if needed.

However, S&P said that the addition of Swan into the group will reduce Sanctuary’s flexibility to respond to any unanticipated cost increases, for example higher-than-planned investment needs in both Sanctuary and Swan’s existing stock.

The credit ratings agency said it has therefore revised the outlook on Sanctuary to negative from stable, reflecting the risks associated with taking over Swan amid sector-wide cost pressures that could result in “structurally weaker financial indicators”

S&P said it estimates that Sanctuary’s adjusted EBITDA margins will strengthen to close to 20 per cent after temporarily weakening in the next two fiscal years as Swan becomes an operating subsidiary of Sanctuary. It said the main driver is the planned large investments on Swan’s existing stock.

The credit ratings agency said it expects a temporary weakening of Sanctuary’s non-sales EBITDA interest cover before strengthening by financial year 2025.

It said it expects the meaningful scaling-down on both housing associations’ development programmes and exit of some of Swan’s non-viable schemes will help to contain debt built up over the next 12 to 24 months.

S&P added that development for Swan’s sale schemes will likely increase the combined group’s sales exposure, but it forecasts that revenues from these will not exceed one-third of its total revenues.

S&P said: “The ‘A’ rating on Sanctuary reflects our opinion that its financial metrics will recover in the next two years after temporarily weakening due to the integration of Swan. Sanctuary has a strong track record and expertise in absorbing distressed entities into it, including Cosmopolitan Housing, Thistle Housing and Cornwall Care, to name a few.

“On the other hand, Sanctuary’s financial headroom has tightened, and we think it will be difficult to mitigate unanticipated inflationary pressures on its cost base, potentially lower revenues particularly from development for sale schemes, or additional investments required on its existing stock.”

S&P added: “We understand that thorough due diligence has been conducted on Swan and that the business plan has specific targets to strengthen Swan’s currently weak financial standing.

“However, we do not disregard that Swan’s current financial distress imposes challenges that could go beyond those already anticipated by Sanctuary through the integration process.”

Sanctuary was contacted for comment.