Champagne corks may have been popping at Connells’ and Countrywide’s HQs recently but not so at credit rating Fitch, which has warned there are some risks involved.
After the takeover was finalised last week, Fitch has now maintained the credit rating of Connells’ parent company Skipton Building Society to an A-minimum negative outlook.
Fitch says the deal, although potentially lucrative if executed well, has risky downsides given Connells must reverse Countrywide’s three-year run of losses.
The rating agency is also worried by the huge numbers involved; Skipton is lending Connells £253 million via an unsecured loan to both complete the deal, pay off Countrywide’s outstanding debt and provide some working capital. But overall it believes “that the intercompany loan being provided to Connells does not significantly impact our assessment of SBS’s asset quality although it brings some risk concentration”.
“Fitch understands from management that Countrywide needs sustained and significant investments in technology, branches and staff,” says Fitch.
“The risks Connells and SBS face include the ability to integrate Countrywide and resolve some of the structural factors that are constraining its earnings, at a time of lingering challenges from the coronavirus crisis.
“The business also remains highly sensitive to the outlook for the UK housing market, which remains uncertain.”
Fitch has also said that, although the deal could make the joint Connells/Countrywide a titan of the UK housing market, it is likely to take several years to complete successfully during which the UK is likely to be enduring a post-Covid recession.
“Skipton Building Society’s ratings could also be downgraded if the acquisition of CW leads to a significant erosion of profitability over the medium term,” it says.