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Moody’s reaffirms ratings on two associations ahead of merger
Two housing associations due to merge and create one of the biggest landlords in the South of England have had their credit ratings reaffirmed by Moody’s.
In April Radian and Yarlington revealed their plans to merge, creating a 38,000-home group. The deal is expected to complete next month, when 10,000-home Yarlington will become a subsidiary of Radian.
Moody’s said today that it is maintaining its A3 issuer rating on both associations and its A3 rating on their longer-term secured debt, as well as stable ratings for their outlooks.
The agency said that the affirmation was “based on the expectation that the credit strengths of the merged entity will reflect those of the standalone entities, including strong financial performance, very strong liquidity, debt metrics in line with peer medians and a modest capital expenditure burden”.
Radian, which operates mainly across Hampshire and Berkshire, and Somerset-based Yarlington both currently have regulatory ratings of G1/V1 – the highest possible grades for governance and financial viability.
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Moody’s added: “The credit challenges of the merged entity will also be similar to those of the standalone entities, including material exposure to market sales risk and a relatively low unencumbered assets position.”
Radian’s margin has averaged around 32% over the past five years and Yarlington’s has averaged 33%, the agency noted.
As a single group, Moody’s said it expects the operating margin to “weaken moderately” to between 27% and 29% in the first three years post-merger due to “spending on personnel and infrastructure focused on integrating the two organisations”.
But it added: “This is then expected to recover to 33% in FY 2023 as merger efficiencies are realised.”
Looking at risks to the outlooks, Moody’s said these include “failure to meet market sales targets or an increase in market sales exposure beyond business plan projections, social housing lettings interest coverage sustained below 1.2x or an increasing indebtedness beyond business plan projections”.
Gary Orr, chief executive of Radian, joined the organisation from Yarlington in October last year.
Caroline Moore, Chief Financial Officer (designate), Radian Group said: “In anticipation of a partnership between Radian and Yarlington we’re encouraged that the rating for both organisations remains unchanged at A3 stable.
"We believe a strong performance from Radian and Yarlington combined with an exceptional liquidity position has us well placed to fulfill the aspirations of the combined group to better meet the challenges facing the social housing sector.”
