Genesis set for credit rating upgrade on back of Notting Hill merger
Moody’s has placed Genesis HA’s rating under review for an upgrade in light of its planned merger with Notting Hill Housing.
The shareholders of both G15 landlords voted to approve the tie-up last month, which will create one of the UK’s biggest housing associations with 64,000 homes.
Moody’s Public Sector Europe said on Friday last week that it has placed both the Baa2 long-term issuer rating of Genesis Housing Association and the long-term senior secured ratings of GenFinance II Plc under review for an upgrade in anticipation of the planned merger with Notting Hill, which is expected to be completed next month.
Notting Hill has an A3 rating with a stable outlook from Moody’s.
The change would move Genesis away from its position as one of the lowest-rated in sector.
Genesis’ current rating of Baa2- is two notches above sub-investment grade. Poplar Harca is the only other association currently on a Baa2 rating by Moody’s.
Genesis has been downgraded twice in recent years, the second of which from Baa1 was part of a sector-wide ratings cut by Moody’s in September, which was triggered by the agency’s wider action to cut the UK’s sovereign rating. But Moody’s has also expressed concern about the reliance by Genesis on riskier private sales activity to finance its development programme.
Banks and funders pointed out to Social Housing in October last year that a move into ‘bbb’ territory can become expensive or prohibitive for some investors. There have been similar warnings since.
Moody’s said that the upgrade review reflected Genesis’ planned merger with a housing association with a stronger credit profile.
It said the new organisation Notting Hill Genesis, which will have a combined operating margin of 28 per cent, is expected to have a stronger credit profile than Genesis on a standalone basis
Moody’s said: “Notting Hill’s stronger profitability will benefit Genesis’ historically weaker margins. Notting Hill has demonstrated its ability to improve the profitability of its core business and we expect the merger to deliver material efficiency savings, with a positive impact on operating margins and interest cover from social housing lettings.”
It also said the new entity, which will have a combined social housing letting interest cover of 1x, will benefit from a ‘relatively low’ level of indebtedness.
The review will focus on the credit strength of the merged entity, taking into account the increase in development and market sales activity planned by the merged entity.
“We expect the merged entity to retain some of the credit challenges of Genesis on a standalone basis, including a continuation of high cash flow volatility and growing market sales exposure. Recent adverse trends in the London housing market reinforce the uncertainty of market sales cash flows.”
The two housing associations had a combined turnover of £665m in the year ending Genesis’ March 31, 2017.
The merger had been expected to complete at the end of the 2017 calendar year.
A spokesperson said last month that the “decision to defer this slightly was made in the interests of ensuring the process ran as smoothly as possible for everyone involved”.
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