S&P: Mega-merger unlikely to affect ratings

The rating agency on Friday affirmed AA ratings for L&Q and Hyde Group. This means the landlords retain the second-highest possible rating and the agency considers their ability to meet financial commitments as “very strong”.

L&Q, Hyde and East Thames announced this month they are in talks to create a 135,000-home merger with the capacity to build 100,000 homes over 10 years. 

Standard & Poor’s, in the rating documents published about L&Q and Hyde on Friday, said: “Our latest information on the deal suggests it would have a neutral impact on the ratings.”

The agency said both landlords have a strong financial profile and expects them to remain strong.

However, it did not rule out a negative rating for the landlords by the end of the year if the agency’s expectations of the effect of the merger change.

Standard & Poor’s said L&Q’s debt to pre-tax earnings ratio is “low” at 9.9x. It forecasts this to increase to 12.5x over the next two years due to L&Q gearing up to deliver an “ambitious development programme”, but considers this to still be moderate.

Regarding Hyde, Standard & Poor’s said: “We expect Hyde will maintain a stable and sound operating margin at about 30% over the forecast period, underpinned by continuing strong revenue inflows from new units, profits from shared ownership and a reduction in staff costs and efficiencies.” Standard & Poor’s said it believes these measures will largely offset the impact of the 1% annual rent cut. Hyde in October told staff it will need to cut its expenditure by £32m by 2020/21.

East Thames is rated by Moody’s and in November had its credit rating cut due to an over-reliance on market sales to pay its interest costs. The 15,000-home, east London-based landlord made £20.7m through selling homes developed for outright sale last year, 14.2% of overall turnover.

The new three-way merger would create an organisation with a £1.1bn turnover and an estimated value of more than £30bn. If it achieves its goal of building 100,000 homes a year – 35,000 homes more than the total the individual landlords were planning to build separately – it would become the fourth-largest house builder overall according to current output figures.