Fitch Ratings has placed Miller Homes Group Holdings plc's Long-Term Issuer Default Rating (IDR) of 'BB-' and senior secured rating of 'BB+'/'RR2' on Rating Watch Negative (RWN).
The RWN follows the agreement with funds managed by Apollo Global Management (Apollo) to acquire the company from its existing owner Bridgepoint Group Plc (Bridgepoint). It reflects our expectations that the recapitalisation of the company under the new ownership structure may increase leverage levels beyond the current downgrade rating sensitivity of funds from operations (FFO) gross leverage of above 3.5x.
We will resolve the RWN after we have assessed the post-acquisition financing structure, which may result in an affirmation if the financial profile remains within our rating sensitivities, or a downgrade if credit metrics exceed the negative rating sensitivities. We would also assess the company's post-acquisition business strategy. The transaction is expected to complete in 1Q22.
Key Rating Drivers
Limited Information on Financing Structure: Funds managed by Apollo affiliates, together with existing management, have entered into a definitive agreement to acquire Miller Homes from the current owner, Bridgepoint. Apollo has committed financing to complete the acquisition and expects to redeem the existing financing before the close of the transaction, but has not yet disclosed the acquisition amount or the new capital structure.
Regional Homebuilder: Miller Homes is a medium-sized UK housebuilder focused on central Scotland, northern England, the Midlands and to a lesser extent, southern England. The company specialises in single-family homes with an average selling price (ASP) in 2020 of GBP261,000. The products offered are highly standardised, although the company recently launched a product range that allows greater personalisation of interiors.
Solid Trading Performance: Miller Homes' activity quickly rebounded in 2021 after a subdued 2020 due to the pandemic. In 1H21, the company reported strong business performance, with 1,910 homes completed. This output is more than double that in the same period of 2020 and 13% ahead of pre-pandemic 1H19. Sales in 1H21 (GBP525 million) were higher than 1H20 (142%) and 1H19 (35%) supported by the ASP, which increased by 15% to GBP280,000 in the period.
Sales Visibility: Sales visibility is good, with the order book standing at GBP707 million at end-1H21 (2020: GBP560 million). This equates to over eight months of sales coverage based on the current trading figures or around 2,525 units based on the 1H21 ASP. The GBP17 million acquisition of Wallace Land and Investments Limited - a regional land promoter - in May 2021 added 17,500 plots to Miller Homes' strategic landbank, which comprised 37,802 plots at end-1H21. Combined with the consented landbank (14,382 plots, equivalent to 4.1 years of supply), these represent 14.9 years of supply based on the last 12 months' completion volumes.
UK Housing Market Undersupplied: The UK housing market continues to be under-supplied as the amount of the newly-built homes keeps falling significantly short of the annual 300,000 units the government expects. In the 12 months to end-March 2020, there were 243,770 newly-completed homes. Fitch expects Miller Homes to benefit from this inherent undersupply, particularly in regions away from London where the structural housing need is conducive to a less volatile market. In 1H21 Help to Buy-backed reservations reduced to 19% of the total (1H20: 38%).
Active Capital Management: Miller Homes has reshaped its capital structure over the last four years, aided by its consistent free cash flow generation. In 2018, the company bought back and cancelled GBP20 million of its senior secured notes and repaid GBP43.5 million of its intercompany loan. In July 2020, Miller Homes issued a GBP160 million private placement with the proceeds partially used to redeem GBP110 million floating notes. This allowed the company to extend its debt maturities, with the GBP404 million fixed notes maturing in 2024 and GBP51 million floating notes maturing in 2023. In March 2021, the company repaid GBP100 million of its shareholders loan (1H21: GBP49 million outstanding).
Derivation Summary
Miller Homes' focus outside London and the south-east differs from that of The Berkeley Group Holdings plc (BBB-/Stable). Miller Homes' outputs are typically single-family homes with an ASP similar to England's ASP (GBP267,000 in 2020). Berkeley's homes are often part of large conurbations that accommodate neighbourhoods of 1,000 to 5,000 units, with a selling price averaging more than GBP700,000 in the past four years, the highest among its UK peers. In their last respective fiscal years, the two UK housebuilders had similar volumes (Miller Homes: 2,620 units; Berkeley: 2,825), well below the largest UK housebuilders, which deliver more than 15,000 units a year.
The Spanish housebuilders AEDAS Homes, S.A. and Via Celere Desarrollos Inmobiliarios, S.A. (both BB-/Stable) focus on the most affluent areas within their domestic market and the products offered (apartments of large condominiums) share similarities with Berkeley. Irrespective of the geographic focus and the product range, Spanish and UK-based housebuilders' funding requirements are comparable, with both relying only on a small purchaser deposit (5%-10% for the UK and up to 20% for Spain) to fund land and development costs in the period up to completion.
Miller Homes' financial profile well compares with that of Aedas and Via Celere. The two Spanish housebuilders launched their inaugural notes issue in 2021, while Miller Homes issued its inaugural senior notes in 2017 (GBP425 million in October, recently tapped for an additional GBP50 million). The deleveraging paths of the three companies were slightly hampered by the pandemic, and for some entities recent M&A activity, but Fitch expects FFO gross leverage to be restored within its guidance in the next 12-18 months for all three entities.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Top-line growth mainly driven by volumes, increasing to over 4,000 units by 2023, with a selling price averaging GBP273,000 over the next four years.
Net land and development spend included in working capital totalling GBP400 million in 2021-2024.
Existing debt (GBP455 million) refinanced at maturity.
Fitch assumes that the remaining GBP49 million shareholder loan is repaid in 2022
No dividends distribution in the next four years
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
FFO gross leverage above 3.5x on a sustained basis
Order book/development work in progress materially below 100% on a sustained basis, indicating speculative development
Distributions to shareholders that would lead to a material reduction in cash flow generation and slower deleveraging
Land bank/gross debt ratio below 1.0x
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The ratings are on RWN due to the planned acquisition. We therefore do not expect an upgrade.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Good Liquidity: At 1H21, Miller Homes' liquidity was ample. It comprised GBP227 million cash and a GBP151.5 million undrawn revolving credit facility, whose size was increased by GBP21.5 million in 2020. At end-June 2021, gross debt comprised two senior secured notes totalling GBP455 million, maturing in October 2023 (GBP51 million) and October 2024 (GBP404 million).
Issuer Profile
Miller Homes is one of the largest privately-owned housebuilders in the UK with a strong regional focus through three divisions: midlands & south, north, and Scotland.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
RATING ACTIONS
Entity / Debt
Rating
Recovery
Prior
Miller Homes Group Holdings plc
LT IDR
BB-
Rating Watch On
BB-
senior secured
LT
BB+
Rating Watch On
RR2
BB+
Page
of 1
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
APOLLO GLOBAL MANAGEMENT, INC. 
