Credit rating agency concerned about merger partner Extra Care Charitable Trust’s lease-based operating model

Standard & Poors believes Housing 21’s creditworthiness would be lowered by its proposed merger with retirement village developer Extra Care Charitable Trust (ECCT).

The credit rating agency has placed the £250m-turnover housing association’s ‘A-‘ long term issuer rating on ‘creditwatch’ meaning it believes that a rating change is likely in the next 90 days.

It said: “The creditwatch placement reflects our view that H21’s potential merger with Extra Care Charitable Trust (ECCT) would result in a combined group with weaker creditworthiness than Housing 21 on a stand-alone basis.

“Based on publicly available information, we consider that ECCT’s operating model carries higher risk than that of H21.”

S&P said ECCT primarily sells homes to older people under long lease contracts and are obligated to buy the unit back when the lease terminates. It said ECCT’s operating surplus would dilute the combined group’s earnings and that the “operating model could potentially result in future debt-like obligations”.

It said: “In our view, this could add to pressure on the group’s adjusted debt metrics and potentially create a more volatile liquidity position.”

S&P placed both Housing 21’s long-term ‘A-‘ issuer rating and the same rating for its £500m bond on credit watch.

Birmingham-based Housing 21, which manages 22,000 homes and has turnover of £250m, announced in March it is in discussions with ECCT about joining together into a combined group.

Housing 21 manages 494 retirement living schemes and 145 extra care schemes, operating in 240 local authority areas. It completed 691 homes in 2022/23. ECCT, based in Coventry, is smaller with 4,238 homes in 16 extra care villages and a turnover of £47m.

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 The pair believe the merger would allow them to strengthen their finances and build more homes.

Under the proposed deal, Housing 21 boss Bruce Moore would become chief executive of the combined group with ECCT chief executive Mick Laverty remaining for a while “to take on strategic projects to support the success of the merger”.

A spokesperson for Housing 21 said: “A final decision on the merger will be made by the end of September once the due diligence is completed but will be subject to board approvals.

“The revised financial metrics and liquidity requirements of the combined group will be a key part of the board’s decision.”