L&Q's £500m bond secured ahead of 'more issuance to come from the sector'

L&Q priced its second issuance of £500m bonds in just seven months in February, at coupons of 2.625 per cent and 3.125 per cent, but wider spreads than last summer.

The 90,000-home provider, which plans to deliver 100,000 new homes over 10 years, set a new record for the sector when it went out to the markets for £500m in July 2017, split into two tranches. It repeated that last month with another £500m of sterling secured notes, which was again split into a £250m 10-year tranche and a £250m 35-year tranche.

The group met 35 investors during its roadshows. The latest 10-year tranche priced at 118 basis points over gilts, giving a coupon payable at 2.625 per cent. The 35-year priced at 135 bps over gilts, giving a coupon payable at 3.125 per cent.

Asked about the timing of the issuance, Martin Watts, director of treasury at L&Q, said part of the reason is that L&Q has debt maturing within one year, so is addressing refinance risk.

“This ensures that we will maintain enough liquidity to complete our committed development pipeline while maintaining compliance with our liquidity ratio that must at all times be at a minimum of 15 months.”

He added: “There is a consensus that there is more issuance to come from the sector. Taking this on board, together with the perception of the interest rate environment and some volatility in the markets, we felt that going now was an opportune time.

“The market has pushed spreads wider based on the volatility of late, the interest rate environment and possibly Brexit.”

This week has seen two more housing associations - Optivo and Great Places - go out to the capital markets, while a new bond aggregator is targeting a £1bn issuance in the spring.

Mr Watts said investor appetite is likely to be dependent on varying factors on a deal-by-deal basis, such as broader supply, relative value of a particular deal and capacity constraints by investors that are likely to hold counterparty limits.

He said take-up for L&Q was good and from a broad spectrum, including from investors that had not previously participated in their issuance. Funders were focused on the credit rating environment, sales exposures, capacity to absorb long-dated debt, the political and regulatory environment and the Grenfell Tower tragedy.

L&Q did not place any towers in charge as security for the bonds. Asset cover was charged at the usual MV-T of 115 per cent and EUV-SH of 105 per cent.

The housing association sector as a whole was downgraded by Moody’s in September last year as a direct result of the ratings agency’s downward action on the UK sovereign rating.

When asked whether he felt some investors are viewing the sector differently, particularly in light of the Moody’s downgrade last autumn, he said: “Investors will think differently if ratings are pushed to BAA1/BBB+ given Solvency II and associated capital requirements.”

The pricing on the shorter-dated tranche was 18 bps wider than in July, while the longer-dated tranche was 30 bps more expensive.

Mr Watts said the new issue premium that was paid reflects the fact that L&Q now has around £2.5bn in issue, of which £1bn has been raised within a short time frame.