Professionals’ league 2023: capital markets deal flow cools, with bonds down 62%

Social Housing’s data over the 12-month period largely reflects this sentiment, with 37 of the total deals happening before the September Mini Budget. The majority of these were concentrated within the first two months of the year and the summer period, which respondents say anecdotally was a busy time for deals.

Trends surfacing in response to this market volatility included a reduction in US investors engaging with the sector, says Beth Collett, partner at Addleshaw Goddard, which was listed multiple times as funders’ legal advisor across deals.

“We’re not seeing a lot of the US investors come through,” she says. “They’re just not in the right sort of space in terms of pricing. We’re still seeing some Canadian investors on our deals and the UK investors are chomping at the bit and waiting for deals to come to market because they have that money to spend still and the ability to deploy it.”

Adding to this, Mike Roche, director at Savills Financial Consultants, says: “It’s just become a lot more unpredictable because I think the relative value between the investors that are investing in sterling compared with the UK [investors] who are clearly just investing in sterling swings quite a lot and very frequently. So, in one week the US investors could be really competitive, the next week they’re not. That makes it really important to have a good handle on the market and when you’re going to approach that market.”

HAs and deal size

The high interest rate environment has also seen deal size and loan terms reduce. Ms Korobova says that when organisations did raise funds, this tended to be smaller bilateral loans, for example to finance a small stock acquisition or a particular development project.

Many HAs have also been relying on existing revolving credit facilities with banks. “These are shorter term, but the margins they have to pay on those facilities are tighter, so it’s been a cheaper way for them to borrow in the current environment,” she says.

Our figures reflect this, with 34 of the deals completed in the period being £80m and below (compared with 31 the year before), and 18 deals being £81m and above (compared with 38 before).

The largest deals over the period were two bonds. GreenSquareAccord’s £400m deal in November 2022 was the largest. This was a 25-year sustainability bond at a rate of 5.25 per cent, which the HA says was 0.75 per cent below the rate assumed in its financial plan.

The second deal was Jigsaw’s £360m, 30-year sustainability bond secured six months before in May 2022, at a rate of 3.375 per cent.

At the other end of the table, there were a cluster of deals under £10m, with the likes of Optivo and Network Homes, in May 2022 and March 2023 respectively.

Mr Roche says the move towards smaller deal size could also explain the rise in institutional loans for the period. He says: “Some of those direct institutional approaches can do [lower] sizes, so that can be quite helpful in terms of running that alongside a revolving credit facility, for example. You’ve also got the ability to negotiate the covenants agreement as well.”

Aggregators

Aggregator deals for the period reduced in volume to 13, compared with 16 in the previous 12 months to 31 March 2022, while deal value was up. It totalled £647.2m, compared with £471.4m in 2021-22.

Of the four aggregators, the Affordable Homes Guarantee Scheme (AHGS), which is managed by ARA Venn for the UK, accounted for the highest number of deals (six). It was followed by Blend (four), GB Social Housing (two) and MORhomes (one).

The largest of these deals was the AHGS’s £130m loan to Torus in March 2023. The deal was revealed at the time as part of a package with two HAs, with Stonewater borrowing £70m and Coastline borrowing £50m. Each were based on a 30-year term and an interest rate of 4.809 per cent. AHGS received the funds via ARA Venn, which raised £350m through a new bond issuance.

Oriane Auzanneau, managing director at ARA Venn, says that the lower volume was not surprising, with “organisations taking time to adjust to a new macroeconomic environment of higher inflation, rising interest rates, and uncertainty around the rent cap”.

She adds that the increase in value “shows the benefit of using these types of [aggregator] structures for the sector”, and that under the AHGS, the funding had “the advantage of having a very attractive cost of capital so that is clearly a really strong attraction for borrowers”.

Andrew Morton, chief executive of MORhomes, says that one challenge over the period was that HAs were having to overcome “a mental hurdle” that generally the cost of borrowing had gone up.

“Not very long ago, HAs were getting their loans for three per cent or less, and all of a sudden they’re looking more like over six per cent. So, it’s a fundamental difference and there’s clearly a period of adjustment that’s needed.”

He says that despite the drop-off in deals, and the current shift towards shorter-term, smaller loans, the need for long-term funding would return.

“It’s clear the demand is there,” he says. “These are businesses that are dealing with long-term assets that therefore need long-term funding. They can’t go on running off revolving credit facilities forever, they need the funding to give them the certainty in terms of rates and in terms of the availability of the finance in the first place.”

Advisors, lawyers and valuers

This report looks at the advisors, lawyers and valuers acting across deals. Figures show that Centrus advised on 13, followed by Chatham Financial with eight and Savills Financial Consultants with seven. Allia C&C and Santander both advised on one deal, although it is worth noting that there were 22 deals that had no funding advisor listed.

For the funder’s legal advisor, Addleshaw Goddard acted across 26 deals, followed by Anthony Collins (12) and Pinsent Masons (eight).

Devonshires and Trowers & Hamlins, meanwhile, accounted for a higher proportion of deals as the HA’s legal advisor. Devonshires had 18 deals where it was listed alone, while Trowers & Hamlins had eight. They then both appeared in multiple deals as the HA’s legal advisor, along with other lawyers.

Future deal flow

Looking ahead, commentators tell Social Housing there are signs that activity is starting to pick up, with deals on the horizon.

Joe Atkinson, associate at Savills Financial Consultants, says: “[In the past year], it’s always felt like the next three to six months was when the market would pick up again. And as we moved through the year, that three to six-month horizon kept on moving forward. That’s largely as a result of inflation proving stickier than everyone expected and the economy proving more resilient, and those interest rates expectations building.

“But it seems like we really are starting to get near the peak, with the rhetoric coming out of the Bank of England and what traders are pricing in. And we can see that in the market activity. We’re aware of two private placements that have launched to market and are pricing [this] September, and we’re aware of some larger-scale public transactions that will be likely launching Q3 this financial year.”

In the aggregator space, Ms Auzanneau adds: “Organisations have been updating their business and funding plans to reflect the changed environment and we now have a very strong pipeline of deals, so the team is busy for sure.”

A trend likely to continue into the 2023-24 data is HAs moving to the banking market over private placements to meet their funding needs.

But on this, Mr Tattersall says: “These trends have continued into early 2023-24, albeit there is only so long the sector can hold its breath – [it’s been] a quiet couple of years in the capital markets, but the need for long-dated fixed-rate debt remains. Should rates stabilise, an uptick in activity should follow.”

He adds: “Macroeconomic conditions and sector-specific headwinds are also driving associations to consider alternative delivery structures, either releasing capital via divestment or through new delivery partnerships. Examples include Legal & General’s tie-up with Metropolitan Thames Valley, which allows greater delivery for less capital consumption for the housing association and offers institutional partners the chance to invest more directly in asset ownership. While current capital costs make deal structuring trickier, the drivers for this remain – this type of structure is here to stay.”

In terms of investor trends, Mr Roche says that many favour HAs with higher credit ratings.

This chimes with comments by Ms Korobova, who says: “Ratings are quite important for us as an insurance company. Despite the sector headwinds, most of the sector is still rated in the A category and we’ve been focused more on the A+/A1-rated names given the more volatile operating environment. We have seen a lot of downgrades in the last 12 months and some HA ratings dropping into the BBB space, which is just a different risk profile – the sector is still financeable at this rating level, but ultimately we’d need to charge a higher spread level for lower-rated names. So, in this environment, our focus is on the stronger names.”

Auditors

As part of this report, Social Housing has also analysed HAs’ 2021-22 financial accounts to find the total amount paid to auditors by associations with a bill of £100,000 or more.

A total of £15m was paid in fees by HAs over the period, which was up nearly 13 per cent on the 2020-21 period. This was made up of £12.9m in audit fees (up 18 per cent on the previous year) and £2m in other services (down 10.4 per cent).

As with previous reports, BDO had the highest number of clients (26), with a total of £5.6m in fees. KPMG followed with a total of 19 clients, although its fees were higher at £6.2m. Beever and Struthers followed with six clients and total fees of £798,000, which represented the biggest fall in total fees for the period.

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