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Newly formed 85,000-home landlord hit with credit rating downgrade
Sovereign Network Group (SNG) has been downgraded by a leading rating agency over concerns that its sector-defying development plans and rising spending on current stock will “weaken” its credit metrics.
S&P has revised the long-term issuer credit rating of the 85,000-home landlord, which formed last month through the merger of Sovereign and G15 landlord Network Homes, to A from A+. The group’s outlook is negative.
“The downgrade of SNG reflects our projections that the group’s debt-funded development programme and steadily increasing investments in existing homes will weaken its credit metrics more than previously assumed,” S&P said.
SNG was bucking the trend in the sector by continuing with a “relatively large” new-homes development plan, S&P said.
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When the merger was announced earlier this year, the groups said they planned to build 25,000 over the next 10 years, nearly 4,000 more than previously planned.
Other major landlords have slashed their development plans amid the current tough economic conditions, including Southern Housing, which this summer said it was cutting starts to 250 a year.
S&P warned that as SNG was using debt to fund housebuilding while interest rates remained high, this would weaken its debt metrics.
“We calculate that 20% and 9% of Sovereign’s and Network’s respective debt was at variable rates as of March 31, 2023, and with higher underlying rates projected in fiscal 2024 and 2025, this will negatively affect SNG’s interest costs,” S&P said.
S&P also warned that the group’s margins would probably weaken because of a “significant increase” in spending on existing homes. Many landlords are having to spend more to tackle damp and mould issues and boost the energy efficiency of properties.
The agency predicted SNG’s margins would average around 21% over the next three years, which is weaker than its base case of 25% for Sovereign before the merger.
In its last full year, Network Homes’ surplus nearly halved, to £5.2m on turnover of £243m, while its operating margin fell to 16.1%.
However, S&P said it believed only a third of SNG’s development programme over the next three years was committed and that its investments in existing homes included provisions and potential spending that could be phased out later.
The agency also said SNG’s liquidity position was “strong”, while its board and executive team had “solid experience in managing social housing providers, supported by strong governance and treasury practices”.
S&P said its negative outlook reflected “the risk that increasing investments in existing and new homes will prevent SNG’s credit metrics from strengthening over the next 24 months”.
Peter Benz, chief financial officer of SNG, said S&P’s rating “recognises that against the very challenging external economic environment, SNG remains a good investment with a strong ability to meet its financial commitment”.
He added: “The SNG board remains committed to maintaining the organisation’s financial strength and will only commit to further exposure to development risk within the confines of its proven investment parameters.
“SNG has very low levels of unsold stock, with its expanded geography providing a natural risk hedge against localised housing market movements.
“SNG’s business plan shows, notwithstanding short-term pressures, substantial improvement in financial metrics over the medium term and flexibility to retain strong credit quality in the event of deteriorating macroeconomic conditions.”
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