Incommunities: £250m bond issue at all-in cost of 3.33% a good result, says finance head

News26 Mar 2019James Wilmore and Social Housing

Bradford-based housing association Incommunities has issued a 30-year £250m bond, of which £50m is retained, as part of a refinancing strategy that has also seen it release 30 per cent of its securities from charge.

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The bond, issued on 14 March, was at a spread of 157 basis points over gilts and an all-in cost of 3.33 per cent.

Speaking to Social Housing, Greg Robinson, assistant chief executive of resources at Incommunities, branded the issue a “good result” for the group in the midst of Brexit uncertainty.

“We had to consider a lot of issues, particularly unwinding our existing fixed rate. But the markets are still active and interested in social housing debt,” he said.

The bond raise followed a group-wide financial review, with the funds being used in part to refinance some existing debt. Issued by Incommunities Treasury PLC, with a coupon of 3.25 per cent, the bond will allow funds to be on-lent to registered provider subsidiaries Incommunities and Sadeh Lok.

The process also required 22 separate derivatives to be cancelled. The cost of breaking the fixed rate agreements was approximately £30m, Mr Robinson said, “however the comparatively lower cost of borrowing in the current market more than offsets the increase in borrowing required to fulfil the refinance strategy”.

He added: “There remains a long-term £40m fixed-rate facility with one of our bank funders. But the number of embedded fixed interest rate derivatives has reduced as a result of the refinancing strategy.”

While no banks chose to leave during the process, Mr Robinson said that Incommunities “selected the best offers with regard to pricing and terms” after inviting a number of lenders to provide it with terms for its bank funding requirements.

During the process, Incommunities also released 30 per cent of the security from charge.

Mr Robinson said: “The release of charged property provides additional security to enable the retained portion of the bond issue to be drawn down and provide the basis for further refinancing when the opportunity arises sometime in the future.”

A week before the bond issue, on 7 March, Incommunities was awarded an A+ credit rating from Standard & Poor’s (with a negative outlook), helped by what the agency referred to as its “conservative financial policies”.

According to JCRA, the rating had a “significant positive impact on pricing of both the bank and bond debt”.

Adrian Bell, director of social housing at JCRA, said: “This was a complex process involving the need to co-ordinate the sale of the bond with the restructuring and renegotiation of the bank debt and the requirement to cancel a large swap portfolio at the same time the bond was priced.”

Building momentum

Alongside refinancing, Incommunities will also use funds to invest in its current housing stock.

“We have to address some of our weaker-performing stock and improve it,” Mr Robinson said. “We can also release more funds for stock reinvestment.”

As part of a 10-year strategy to 2025, the association plans to build 1,000 new homes for social rent and 400 for market sale. “We are on track with that,” said Mr Robinson.

On top of that, its longer-term strategy from 2025 to 2040 involves building another 3,000 houses for social rent and replacing 1,700 “weaker” performing units.

Mr Robinson said there were no plans at the moment for more market sale as part of this strategy.

“We will inevitably look at them [market sale homes] but they are not a big part of the business,” he added. “We recognise from our experience from speaking to investors about their concern over market sales.”

Ratings agency Moody’s this week issued a fresh warning over the “volatile” nature of market sales as an increasing number of housing associations increase their exposure to this type of tenure.

Barclays and NatWest were joint lead managers on the bond, with Incommunities receiving funding advice from JCRA and legal advice from Devonshires.

The funders were advised by Allen & Overy, with property valuation by Savills and Prudential as the security trustee. Trowers & Hamlins provided property security and bank legal advice.