BoE bond-buying benefit 'at the fringes' for A2Dominion £250m deal

It is hoped the scheme - part of an economic stimulus package in response to the fallout from the UK’s vote to leave the European Union - will introduce more liquidity into the HA secondary bond market and tighten credit spreads.

Naveen Rathour, associate director at Lloyds and arranger of the A2Dominion bond, said the move ‘definitely helped some of our investors’ on their position, but may have only moved pricing by one or two basis points. ‘I think the impact of the BoE was at the fringes,’ he said.

Investors offered mixed views on the impact of the BoE programme.

One funder said there are ‘already lots of buyers in the market and not many sellers’. They said: ‘If you’re buying a 30-year bond it’s because you have a 30-year liability. HA paper is good quality. If you sell it, you’ve still got the 30-year liability so you have to replace it with something else, and what’s that going to be?’

Another investor agreed that only new issuance is likely to provide the required incentive. But Simon Bond, from Threadneedle UK Social Bond Fund, said it was ‘a great first step’ for socially beneficial organisations.

David Mackay, director in the debt capital markets team at RBS, added the inclusion of sector bonds ‘is a positive outcome and I would expect support for sector credit spreads in the future’.

A2Dominion issues £250m unsecured bonds at 3.5%

A2Dominion issued £250m of unsecured wholesale bonds at a coupon of 3.5 per cent in a move that gives it flexibility to fund any part of its activities, including market rent.

The 12-year transaction priced in early November 2016 at 230 basis points over gilts and was the first unsecured benchmark issue for the 36,000-home London G15 housing association. It makes it just the second HA after Places for People to go down the unsecured route for a public bond.

A2Dominion has also previously followed PfP into unsecured retail bonds, raising £300m. PfP was the last to issue an own-name bond, £400m unsecured transaction in August 2016 at a coupon of 2.875 per cent and 225 bps over gilts and attracting interest from 160 investors. L&Q issued a 10-year secured bond in October at 135 basis points over gilts and a coupon of 3.75 per cent.

The A2Dominion deal came after it launched a £1bn unsecured Euro Medium Term Note (EMTN) programme, with a view to accessing the debt capital markets quickly and more efficiently. Both the programme and issue were rated A+ by Fitch Ratings, mirroring the long term corporate rating.

The all-in cost on the issuance, which priced on 4 November 2016, was 3.563 per cent. The group had been considering retaining some bonds, but the investor appetite was there to sell all of the £250m.

The bonds were issued by the non-asset holding group parent and can be used anywhere in the group, including in A2D Residential - the market rent arm which already has a substantial amount of stock - and A2D

Developments, which delivers the multi-tenure schemes. A2Dominion, which completed 1,127 new homes last year and achieved a record surplus of £114.5m, has previously taken the same approach on its retail bonds.

While unsecured, there is a group-level asset cover test to display unencumbered security to 130 per cent EUV-SH. A2Dominion has around £600m of housing in management valued on an EUV-SH basis ready to be charged if needed.

Dean Tufts, executive director, finance and strategy, said while there is the capacity to borrow in the charitable RPs, they want to focus it on delivering affordable housing new stock. He said there are no group financial covenants or commercial company financial covenants.

‘This covenant structure, coupled to our group structure, enables us to grow a sizeable business outside of the main asset-owning charitable RPs.’

He explained that regulations at the time of the 2014 retail bonds meant the group, as a Community Benefit Society, could not issue ISA eligible bonds, so had to issue under a SPV, backed by a guarantee from the parent.

He said a correction in the law in 2015 enabled them to issue directly from the registered group parent.

‘So we now have a simplified structure for this and future issues from the programme,’ he added.

He said the 12-year maturity ‘certainly fits the bill’ for market rent, and helps A2Dominion build its credit curve. He added the EMTN offers ‘a lot of flexibility in what we can do and how quickly we can do it’, and that issuing from of it ‘should be a matter of weeks rather than a few months’.

Pricing

Mr Tufts declined to confirm the number of investors in the deal. On pricing, he said the spread would be less for a secured transaction but stressed the bond will fund the wider group. He added it is not just about rates, but also possible refinancing and cashflow restrictions.

‘If funders lent to A2D Residential with no guarantees from the RPs then they will want to see their debt reduced to some extent over the life of the loan, say 10 years, to reduce their re-finance risk,’ he said.

‘That can only be done by retaining cash in the company from profits made, so as to pay down some of that debt. If you have do that then you can’t gift aid those profits away to the charitable RPs in the group and you end up paying tax on those profits.’

A2D currently has over £200m of market rent stock but has no plans to bring in an equity partner, as some others have done.

‘We’re in control of what goes in and what comes out, and if we want to sell anything, the decision is made by the A2D group,’ Mr Tufts added.

‘It’s true that [market rent] yields can vary significantly in London, however in making our investment decisions we consider yield alongside the potential for capital growth.’

Investor appetite

The issuance followed a three-day roadshow in London and Edinburgh. Peel Hunt and JCRA advised on the EMTN structure. Centrus advised on the bond, with Devonshires providing legal advice to the HA. Lloyds was the sole arranger and bookrunner.

Naveen Rathour, associate director at Lloyds, said investors are ‘more sophisticated than they have ever been and want to engage strongly with the sector’, adding that there is an increasing divergence among HAs.

He said they spent a lot of their time talking to investors that had not previously bought unsecured, which he said was ‘time well spent’.

He added: ‘If you’re lending on an unsecured basis, you have to be comfortable with all the activities of the organisation.’

Phil Jenkins, partner at Centrus, said the alternatives to using unsecured bonds for market rent are expensive and restrictive bank project finance for development or non-recourse funding into PRS which would have been secured, less flexible and only marginally cheaper.