Interview: ‘We shouldn't assume how it has always been done is the right way’

Building towards a bond

Guinness sold £250m of 35-year bonds on Tuesday last week at a spread of 145 basis points over gilts and an all-in cost of 2.02 per cent, following a single day of marketing to investors. Another £150m was retained.

The group – rated A2 stable by Moody’s and A- stable by Standard & Poor’s – had been working towards the issuance since last year with the potential to launch in early 2020, before markets were suspended in March amid the pandemic.

Mr Day said that after very volatile markets, central bank announcements, political interventions and daily prime ministerial briefings, Guinness was “looking for a period of relative stability where execution risk was not huge”.

He added: “We did not want to execute in a one-day window with a significant risk that things may have to be suspended.”

He said that the message from advisors – including Barclays, MUFG and NatWest Markets, along with treasury advisor Newbridge – was to avoid “price-finding”, adding that they could afford to wait and assess demand.

The process saw one-day marketing with an investor call, subsequent questions via email and pricing the following day, with 39 investors buying the bonds.

While important to engage with investors, Mr Day said it shows that “you can do things quite efficiently and get in and out of the market quite quickly”.

He continued: “I always wondered what value a three-day process brings when you come to pricing. It’s not a process followed by every other sector.

“There is obviously value in conversations, but what I think this has shown is that there are other ways and we should not always just assume how it has always been done is the right way.”

The book was dominated by existing sector funders, but while the investor call was with 40 investors, there were 100 orders, showing that “it ran quite deep in terms of interest”.

The level of investor demand meant Guinness was able to push down its spread to the sorts of levels seen well before the crisis began, following a widening of spreads earlier in the previous weeks.

He said: “We had such demand that we could push in quite a lot from where we set out, and we did not have just two or three big accounts buying the book – the risk of a price break becomes greater if you only have a few people in the game – but we had broad support and some very big names in there, so we and our bookrunners could afford to be quite… optimistic… in terms of our strategy.”

Guinness opted to increase the initial issuance from £200m to £250m during the course of the transaction.

The money is being used to repay some drawn revolving credit facilities while the certainty of funding costs also gives them some options, such as whether they restructure some legacy instruments.

“I think those are things for us to consider and I think two per cent long-term debt gives us a good opportunity to think about that.”

The deal also marked the first issuance since housing association bonds – including Guinness’ previous issuance in 2014 – were confirmed on the Bank of England’s (BoE) corporate bond-buying programme, extended by chancellor Rishi Sunak as part of the government’s response to support businesses, the markets and the broader economy during the COVID-19 pandemic.

Mr Day said that the BoE may have had an impact, but that it was not a major discussion point among the team over the course of the day.

However he said it does show liquidity in the bonds, while “giving investor confidence that there will be secondary market liquidity”.

“We have seen the secondary market spreads come in a bit since we issued, with Sanctuary and Optivo as well.”

COVID-19 response

Investor questions about rents and arrears included the proportion of customers who are self-paying, in light of the sharp increases in Universal Credit claimants across the country.

Mr Day said that the group’s arrears had improved by the end of financial year 2019/20, but that it has experienced a significant increase in customers getting in touch to discuss support around rent payment.

The FD did not give specifics about the impacts on Guinness’ development and shared ownership sales, saying that the provider expects them to “not be 100 per cent levels”, particularly considering the appetite for banks to provide mortgages.

Guinness had already decided to reduce from 20,000 to 12,500 over a decade, and has strategic partnerships with both Homes England and the Greater London Authority (GLA).

Mr Day said the partnerships offer some certainty, which in turn creates confidence, adding that Guinness can also influence or put a view across about the support they need during the crisis.

“We have got targets to hit and specific tenures to hit, but they are flexible and you are part of the debate.

“We do have a voice in how Homes England and the GLA respond and get the respective construction sectors moving again, and obviously there is flexibility of tenures and guidance on grant.

“I think they are more beneficial in a position like this, rather than less.”

Mr Day said there had already been a fall in demand for responsive services, “probably because people do not want other people in their homes”.

All of that reduces cash outflow, he said, adding that one of the questions for Guinness and the wider sector is how they restart work once the lockdown eases, which means understanding “what things can we control and what will we not be able to control?”.

“We could foresee a surge in demand in responsive maintenance and we can see planned maintenance and development being pushed out in to future financial years, which is something we would then have to consider how we deliver all of that.

“I think it will all depend on the timing of the lockdown ending,” he said, adding that scenario planning had included lockdown easing in May or August.

“What is evident is that government sees construction as one of the areas of the economy that they want to get back up and running quickly,” he added.

“The question is around the capacity within the industry to be able to do that.”

Mr Day said discussions continue with contractors with a focus on prompt payment.

“The disruption would be significant on the operations side, but also we want to support people to be able to support us when we are trying to come out the other side and how we manage the upsurge in demand, and we want to be at the front of the queue as an organisation.”