S&P downgrades Hyde to ‘A’ over increased investment and lower margins

Hyde aims to deliver close to 9,200 new homes over the next five years, of which more than 5,000 would be developed through joint ventures.

S&P said Hyde’s development strategy was built around de-risking its exposure to sales activities by introducing third-party investors as an alternative source of funding for the development of new homes.

It thinks this is still Hyde’s plan, it said, but that it understands that Hyde is taking on more sales risks than previously expected in the near term.

“While Hyde will directly benefit from the revenues of these sales to cross-subsidise the development of new homes, this strategy elevates the group’s exposure to riskier activities. This could lead to more volatility and weaker margins,” S&P said.

“Therefore, though we view Hyde’s management as experienced, we perceive that the increase in sales exposure indicates less conservative risk policies than we previously assumed and a deviation from their strategic planning.

“We have therefore increased our forecast of revenues from sales activities – including exposure through joint ventures – to consistently exceed a third of total revenues. This is despite our expectation that in the long term, direct exposure to sales could reduce as Hyde progresses on the execution of its pre-sale arrangement with institutional investors.”

S&P said it estimates Hyde will require less debt funding than previously expected to develop new homes, but lower non-sales EBITDA will weigh on its debt metrics.

However, the credit ratings agency said it considers Hyde’s liquidity position remains “extremely strong”, estimating that the group’s liquidity sources cover uses by approximately 2.5 times in the next 12 months.

This is because of large, undrawn credit facilities that would cover lower-than-expected proceeds from sales of fixed assets, as well as Hyde’s “satisfactory access” to the capital markets.

S&P said the negative outlook reflects a “heightened risk that Hyde’s exposure to sales activities, its sizable investments in existing stock, and high inflation could result in Hyde’s financial indicators slipping below its current forecast and hamper its anticipated recovery”.

Andy Hulme, chief executive of the Hyde Group, said that Hyde is ambitious to improve outcomes for customers and has “robust plans and mitigation measures in place” to manage the risks it faces.

“Our credit ratings remain strong, despite well-documented challenges facing the sector, including housing market volatility, inflation and supply chain pressures,” he said.

“These issues have meant continued investment in our homes and services, which is the right thing to do for our customers, has impacted our margin in a planned and managed way. Our sustainable financial position gives us the flexibility to make these essential investments and to support our plans for the future.

“Our resilience means we’ll continue to invest in people’s homes and the services they receive. Crucially, given the challenges people face in accessing decent and affordable homes, we’re also continuing to build more new homes. We’re taking a prudent approach to development and are using innovative partnerships to deliver about 9,000 new homes in the next five years.”

Accent Group

Meanwhile, Accent Group, which manages almost 21,000 homes, has retained its ‘A’ rating with a stable outlook from S&P. The credit ratings agency also maintained its ‘A’ issue rating on the £350m bond that Accent Capital issued in 2019.

Accent Capital was set up for the sole purpose of issuing bonds and lending the proceeds to Accent Housing, and S&P views it as a core subsidiary of the group.

S&P said it expects that additional capital grant funding and the use of accumulated cash buffers will keep the Accent’s debt build-up at contained levels, despite an increase in capital expenditure.

The credit ratings agency said it expects the group’s growing asset base and focus on traditional housing activities will support a gradual recovery in the S&P Global Ratings-adjusted non-sales EBITDA.

It expects that the interest coverage will remain “relatively solid” in combination with the group’s favourable cost of debt.

S&P added the stable outlook reflects its view that Accent is “adequately positioned” to maintain its key credit indicators as projected under the credit rating agency’s base case, despite the current operating challenges.

S&P said: “The rating affirmation reflects our view that a gradual recovery in EBITDA and an increase in capital grant receipts to fund development will help Accent absorb the current sector pressures associated with inflation, tightened funding conditions, and the group’s increasing investment in existing and new homes.”

Paul Dolan, chief executive at Accent, said: “This outcome pays testament to the strength of our corporate strategy, financial resilience, and the strong governance and leadership in place at Accent.

“This affords us the ability to continue with our significant development programme building sustainable homes in areas of high housing need and retrofitting current properties to meet the government’s decarbonisation targets. This rating demonstrates how we are equipped to remain agile in a changing world.”

S&P said in both Hyde’s and Accent Group’s credit reports that it applied a one-notch uplift to the standalone credit report to derive the issuer credit rating. This is because it believes there is a moderately high likelihood that they would receive timely extraordinary government-related support in case of financial distress.

Earlier in the month, S&P upgraded the outlook on its rating for Midlands-based provider Bromford to stable from negative, while raising its standalone credit profile for Bromford from a to a+, meaning that it is no longer reliant on the outlook of the UK sovereign. The agency’s long-term issuer rating on the landlord remained at A+.