Swan sells £60m retained bonds in first post-Brexit vote deal

Seven investors participated in the deal, which was two-times oversubscribed when it priced yesterday (7 July 8 2016). It will be used by Swan to refinance some medium-term bank facilities.

It follows the initial 30-year £250m bonds launch with £100m retained in February 2015 at a coupon of 3.625 per cent, at a spread of 130 bps over the UK GT 3.5% 2045 reference gilt and all-in cost of funds of 3.682 per cent. Nineteen investors took part.

The bonds sale comes after Swan, which owns and manages over 11,000 properties in East London and Essex, was downgraded by Standard & Poor’s along with 22 other housing associations across as a direct result of the rating agency’s decision to downgrade the UK sovereign rating from AAA to AA following the EU referendum.

Swan was the only English group placed on negative outlook, which S&P said was down to the level of its exposure to the London housing market. Its previous AA- rating had been affirmed in February 2016.

Jamie Smith, deputy CEO at Swan, said discussions with arranger Lloyds Bank began in the week before Brexit as gilts fell to record lows, adding that they were ‘keeping a close eye on gilts over the last couple of weeks’.

He said it was driven by the pricing available, rather than a scheduled refinancing or investment plan.

‘There is a positive message in that there is investor appetite out there and an opportunity to secure long-dated debt at attractive yields,’ he said.

‘It was really driven by where the market was and the gilt, and all in cost of funds.’

Mr Smith said he was more concerned with all-in cost rather than spread, adding it is difficult to know whether the spread widened as a result of the fall in gilts.

He added there seemed to be a lot of interest from investors, who were asking about the Brexit impact on property prices in particular and also Swan’s ratings downgrade.

‘Certainly our work with Lloyds did not pick up that there were people missing who we would have expected to see,’ he added.

The deputy CEO said while the ratings downgrade was not expected, it was also not a surprise given the uncertainty that Brexit has caused around property prices. He said they have always had ‘some very sensible conversations’ with S&P about the business model and market activity.

Mr Smith said the group had highlighted its strong track record to investors in major regeneration and development, and build for sale, along with mitigation plans.

Setting out its mitigation plans in an investor presentation, Swan said it retains the option to hold the properties and convert units to private rented sector (PRS) housing; that it has existing in-house skills and expertise to manage conversion of units to PRS; that sales have taken place off-plan; and that Swan has significant experience in this sector.

Grant Vaughan, director in Lloyds Bank Commercial Banking’s debt capital markets team, said: ‘Swan has acted quickly to capitalise on the low rates currently on offer, yet the demand for this issue shows investors continue to see the UK social housing sector as a good place to deploy capital.

‘I would expect this placement to stimulate more capital markets activity involving housing associations, particularly given this area has been relatively subdued for some time now.’

Sales market

Of its £109.9m of income in 2016, over £57m of income came from social housing in 2015/16, while £42m was from non-social housing development activity, representing a significant increase year-on-year.

Swan - originally formed in 1992 as Basildon Community Housing Association (BCHA) - plans to build 544 affordable new homes over the next five years, and specialises in regeneration, with schemes to deliver more than 250 homes respectively at both Blackwall Reach, in the London borough of Tower Hamlets, and Cambridge Road, in Barking.

The group plans to sell 571 new homes which will generate a net contribution of £29.1m over the next three years, to reinvest in social housing. It uses Swan New Homes, a private limited company, to undertake development, construction and sale of private residential housing.

Mr Smith said Brexit ‘does not necessarily create more risks, but it makes the existing risks more risky, and increases the variability in terms of outcomes’.

The new funds will be used to refinance some medium-term date, mitigating the refinancing risk through a 29-year maturity profile and at a cheap rate. Mr Smith added that they opted to sell £60m rather than the £100m to offer some flexibility with the remaining funds.

The initial issuance enabled the mature stock transfer association to refinance out of a £480m syndicated loan facility, which included an exit by Co-operative Bank.

In its latest investor presentation, group reported £434m of bank and bond debt, of which 75 per cent is fixed.

The group moved from a £37m deficit in 2015, to an £11m surplus in 2016. That came after its fair value of instruments dropped from £26m to £5.8m. New accounting rules under FRS 102 have been applied.

As part of the response to the rent reduction, the group is looking to reduce overhead costs by £1m per year from March 2016 and exploring tenure conversions.

General needs arrears ticked up from 2.48 per cent to 2.59 per cent in the year, while void turnaround increased from 14 to 17 days.