Gentoo FD: ‘Big Bang’ approach to £460m refinance has ‘significantly increased’ capacity to invest
A ‘Big Bang’ approach to Gentoo’s £460m refinance has freed up almost £100m in investment for new and existing stock, in a complex deal that needed to be adapted in the fallout from the Mini Budget, the group’s executive director of finance has said.
Peter Lenehan, executive director of finance at Gentoo
Sharelines
The transaction, which completed on 26 January 2023, saw £360m of legacy, partly syndicated debt refinanced by a 40-year, £110m private placement, as well as £350m in bank facilities provided by NatWest, ABN AMRO and HSBC. These include £150m in revolving credit facilities (RCFs).
RBS contributed £250m over four tranches, of which £50m is an RCF, at various five to 10-year terms, while ABN and HSBC each provided a £50m RCF, at five-year floating terms.
The interest rates in the restructure were undisclosed.
Improving covenants
Peter Lenehan, executive director of finance at Gentoo, said the social landlord’s corporate strategy of delivering good homes for tenants was at the forefront of the restructure.
He said the Sunderland-based housing association, which manages almost 30,000 homes, increased its liquidity and improved its covenant headroom, from both an interest cover and asset cover perspective, to free up capacity for funding for developments and its existing stock.
He said Gentoo had “significantly increased” its capacity, with an increase in its total facilities of just under £100m. The group now holds £667m of fully secured facilities.
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Mr Lenehan said the refinancing exercise had not touched the group’s £207m 2042 public bond, issued in 2004.
The group’s debt portfolio now also features the 40-year, £110m private placement, £200m of medium-term debt and three £50m RCFs ranging from five to seven years.
He said: “Throughout the project, ensuring the restructure retained its focus in terms of outcomes for tenants was a constant for us.”
Mr Lenehan said Gentoo has restructured away from a complex funding syndicate with numerically apportioned stock and restrictive security trust arrangements.
The finance director told Social Housing in 2020 that he was on a mission to modernise Gentoo’s financing, away from a funding structure that had changed little since the group’s creation via a stock transfer in 2001.
He said Gentoo had always envisaged that it would need to dismantle its old structure to optimise access to new funding.
The housing association took the first step in 2020 by removing the European Investment Bank from its portfolio.
Mr Lenehan said that, following the latest £460m restructure, Gentoo now had a bilateral arrangement with each funder, with specifically apportioned security pots and straightforward market standard asset cover covenants and security release arrangements.
“Our ultimate aim was to move to modern, bilateral relationships with new funders, with new and improved covenants,” he said.
Mr Lenehan said the strategy has been all about balancing risk, which is about tenor, interest rate protection and flexibility.
He said: “From our perspective, what we were keen to obtain was increased liquidity at competitive terms, good market-standard outcomes in terms of interest cover and asset cover and liberalised security arrangements.
“We obtained good outcomes that were well within the targets that we set at the outset of the project.”
Big Bang approach
Mr Lenehan said there was no specific moment when he decided Gentoo’s covenants were holding it back and that the group needed to modernise.
But he said the social landlord had a long-term acknowledgment that it needed to take a “Big Bang approach” after it refinanced its European Investment Bank facility in 2020.
Mr Lenehan said this approach involved “a lot of orchestration” to get “the sheer number” of involved parties – such as existing funders, new funders and The Housing Finance Corporation – together to complete the complex deal.
Gary Grigor, a partner at Devonshires, which provided legal advice across financing, governance and security aspects of the transaction, echoed this.
He said: “It’s probably worth saying that this transaction could only have ever been delivered in a Big Bang-type scenario. Everything hinged on making all workstreams aligned just at the right time to make the transaction succeed.”
Mini Budget impact
Mr Lenehan said the most challenging aspect of the restructure came in autumn last year, with the impact of the Mini Budget on financial markets “unwelcome” in terms of the timing.
He said Gentoo paused the project to reflect on its options, including deferral or postponement, with its advisors, treasury committee and group board.
Mr Lenehan said they came to the “unanimous conclusion” that the majority of the benefits Gentoo was seeking, such as additional liquidity, improved financial covenants and headroom and simplified security arrangements, were still obtainable.
However, he said Gentoo modified its expectations regarding the quantum, mix and length of the capital market debt and length of bank debt it was seeking, which the group was then “pleased to secure good outcomes” from.
Mr Lenehan said: “Despite the real challenges of quite turbulent financial markets, we’re delighted with the outcome, because it has given us the freedoms and flexibilities that we sought.”
John Tattersall, senior director at Centrus, which advised Gentoo on the deal, said: “The transaction, which began in a stable interest rate environment, has had to navigate the challenges that 2022 brought with it.
“Through our close working relationship with Gentoo and the broader range of 12 financial stakeholders involved in the transaction, a successful outcome has been achieved.”
Group finances
Gentoo’s total facilities are now £667m, just under £100m higher than before the restructure.
According to its financial results, the group had £588.1m in total borrowing facilities on 31 March 2022, with £85.7m left undrawn. It had £95.8m in available liquidity, consisting of £76.9m in RCFs and £18.9m in cash balances and overdraft.
Following the restructure, Gentoo has RCFs totalling £150m and over £30m in cash balances and overdraft facilities.
The proportion of Gentoo’s fixed rate debt on 31 March last year was 67 per cent. By March 2023, this would have dropped to 64 per cent. However, following the transaction, it is now around 71 per cent. Mr Lenehan said the housing association will “continue to be proactive” in its hedging strategy.
Mr Lenehan said that, before the restructure, Gentoo’s existing loans were amortising and the weighted average life (WAL) of the portfolio was low compared with the sector and for an organisation with the long-term planning horizon it has.
He said one of Gentoo’s objectives was to extend the WAL, which it has now done, primarily through the private placement.
Mr Lenehan said: “Settlement of the outgoing facilities meant that there were some fixed rates with some relatively modest break costs and break credits arising, but nothing particularly significant.”
Looking at the transaction in aggregate, the weighted average cost of capital has “fallen marginally” as a consequence of the refinancing, he added.
The restructure has led to Gentoo receiving an A+ rating from Fitch.
The facilities obtained as part of the restructure also incorporate ESG terms, reflecting Gentoo’s priorities around improving the energy efficiency of its existing and new-build stock and its commitment to creating apprenticeships.
Centrus worked as Gentoo’s funding advisor, Devonshires as its legal advisor, Savills as the funders’ valuer and Addleshaw Goddard as the funders’ legal advisor.
Centrus arranged the private placement, while M&G Trustee Company was the security trustee.
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