How avoiding loan security pitfalls can ensure smooth bond market access

The security portfolio of 6,500 homes was provided within four months, allowing the Peabody programme to be established at the ideal time, earlier this year.

The fact that it is fully backed by property security from day one allows Peabody to quickly issue a bond when circumstances are right.

Challenging backdrop

This all came at a time when housing providers are facing greater demands on their finances than ever before, in terms of increased investment in existing and new homes at a time of high inflation.

The need to maximise financial capacity to deliver business plans and meet commitments to residents has never been more acute.

There are several elements from our experience with Peabody and other clients that may help other housing providers if they are considering bond finance.

Sufficiently resourced

First, ensure that you have sufficient resources in place so you have up-to-date information on your homes. 

This needs to cover your various housing archetypes and be sufficiently detailed and robust to be relied on by an investor for security purposes.

Investors can be wary of a security portfolio with a variety of tenures, but a clear picture of thorough property knowledge overcomes this.

Collaboration is key

Second, close collaboration with the relevant legal teams is essential. The properties we identify for use as debt security must be vetted by the legal teams for the client as well as the investors to allow their inclusion.

For this process to be completed as quickly as needed, it is not enough for the information on each home to be detailed and robust.

The housing provider and its advisors must be able to work together to smoothly resolve any challenges that arise.

To ensure this was the case with Peabody, we had a ‘pre-match warm-up’ with colleagues from Trowers & Hamlins and Addleshaw Goddard, and agreed our approach to solve common issues we expected to arise. 

An early view of values allowed the teams to target time towards properties that would generate the higher values, while a ‘red, amber, green’ (RAG) rating allowed us to focus on properties that had more potential for fast-tracked documentation.

Commit to success

Third, start as you mean to go on. This means high standards, quick turnaround times and a firm commitment to delivery from the beginning.

Again, we were very fortunate in that Peabody’s in-house treasury team was completely committed to ensuring a successful process and set a positive tone for the whole project team.

Balanced funding mix

There is a perception that the process of agreeing a portfolio of homes as debt security can be complex and slow.

As a result, the use of unsecured debt has increased in recent years, although this is generally more expensive than secured debt.

In our experience, secured bond finance can be an important part of a balanced mix of funding models used by housing providers to maximise their financial capacity.

Undertaking some key preparatory steps makes this process much more straightforward.

Andy Garratt, director of valuations, Savills affordable housing consultancy