MORHomes eyes ‘multitrillion-dollar’ social bond market ahead of debut issuance in new year

Delays
Mr Symington said the company could have gone to the bond market in November 2018, but did not want to be in a position where it faced the Christmas “rundown of the markets”.

A decision to delay “has been fully vindicated”, with recent issues seeing widening margins and less appetite, he added.

But he conceded: “We have to be honest and say we did slightly underestimate the complexity of going to market, getting our platform built and ready, and getting our borrowers ready.

“That was perhaps a few too many moving parts.

“But the latter two are no longer moving parts; we’ve built the platform and got our core of borrowers, who are committed to borrowing and ready to go, and that will meet our minimum requirement of benchmark size, of £250m-plus.”

That marks a significant climbdown from the £1bn single tranche bond, previously described in February.

Mr Symington said: “Either the markets have moved or we have learned more about it. Very few people issue that size.

“It’s not so much the overall single issue size – and in fact it’s possible £1bn is too much – it’s the repeat issues that is important.”

While he agreed that the UK’s planned departure from the EU “could be a problem”, he pointed to recent fluctuations in gilts, adding: “On the other hand it doesn’t necessarily impact the investors we’re looking at. Brexit doesn’t necessarily mean bad news for HAs going to the market, but if there aren’t investors that’s obviously a problem.”

The recent rights issue dilutes the funding vehicle’s shares, but MORHomes’ shareholders gave the move “almost unanimous” support. Mr Symington would not reveal the figure raised, adding that “although we’re a plc, our shareholding is private”.

He added that while MORHomes is a small team, it has to commit pre-issue costs running into hundreds of thousands if not millions on a potential issue of £0.5bn.

These include advisory, bank and legal costs, which will be spread among the shareholders. Its advisor is JCRA, whose director Adrian Bell helped construct the company, while Allen & Overy and Devonshires are among the legal advisors.

Being different

Asked what makes MORHomes different enough to go beyond the usual six to 10 regular sterling investors in the housing association bond market, Mr Symington said it was a “one stop shop” for investors.

“We’re marketing the sector as a whole,” he said, pointing to global funds that know little about UK housing associations and would not typically spare an analyst to explore it.

“It’s just completely not on their radar, particularly if they are European, Japanese or American,” Mr Symington added.

A unique characteristic is that MORHomes has achieved social bond principles (SBP) set out by the International Capital Market Association (ICMA) as a social bond issuer.

According to JP Morgan, it would become “the first issuer in the UK [of any kind] to issue a social bond which is aligned to the social bond principles”.

Mr Symington said this is one aspect that sets it apart from others in the market and also opens it up to a multitrillion-dollar social bond investment market that seeks an SBP accreditation.

“We’re the only organisation in the UK of any sort to have it for corporate bonds. It seems absolutely extraordinary that the social housing movement hasn’t made more of this because our credentials are unimpeachable; we are social organisations.”

He added: “When it comes down to it, everything MORHomes is doing on the investor side is about widening the market and appeal; repeat issuance, spreading the risk, corporate governance structure, social bond programme, implied government support.”

There is no cross-guarantee between housing associations, and rather than looking at the underlying credit of borrowers the chief executive said MORHomes investors will be looking at the capitalised, corporate structure.

He added: “[Funders] will be investing in MORHomes and won’t even know how the underlying loans are made up, because they don’t need to; they rely on our credit policy and the fact we are spreading our risk across the whole sector.”

By “spreading the risk for investors across the sector”, it can show it can incur 10 per cent of the housing association sector defaulting based on its stress-testing, meaning there would have to be a “complete systemic failure of the whole sector” for investors to lose their money.

Mr Symington would not be drawn on previous claims that the aggregator would achieve a spread of 100 basis points over gilts, adding that “obviously the market has moved; spreads have gone up.”

He pointed to pricing in the secondary markets and the premium associations appear to be paying when compared to other corporates as they are “unknown to the wider pool of investors”.

He added that even the biggest housing association issuers are not issuing to the scale of larger corporates, drawing on the view of board member Malcolm Cooper, who issued around £20bn of debt for National Grid during his time there.

“I can’t give you a view on pricing. You have to talk about it relative to what the rest of the market is doing. But the model is still designed to recapture this price premium, which is in the order of 30-50bps above the equivalents, and we believe that’s achievable.

“It may take more than one issue to get that; to get ourselves established and realise those benefits.”

Enhancement: cost and benefit
The MORHomes structure has embedded costs for borrowers such as a liquidity facility and the equity investment.

It includes equity and ‘quasi-equity’ in the form of a CoCo – an interest-earning loan from members which is “cash neutral”, according to Mr Symington.

Second secured debt provides a financial buffer and constitutes a note agreement that has been arranged with an investor and will come into play at the time of issuance.

Mr Symington said benefits will include more efficient borrowing, including security charging that can be done within 18 months of the issuance.

Borrowers would also be able to use the funding for whatever purpose they see fit, with no on-lending limits, onerous financial covenants or barriers to investment in commercial activity.

The credit assessment is instead done on the basis of the business plan, meaning they ‘trust’ the association to get it right.

“We take the view that we understand HAs and we credit assess their business plan, and we trust them to manage their finances within the business plan.”

The aggregator is understood to have an A rating from Standard & Poor’s.

Mr Symington said he was unable to publicise the rating until issuance and stressed that it is applied based on the aggregate strength and not the weakest housing association credit. But he added: “It’s not the be-all-and-end-all, is what we’re told; investors will make up their own mind.”

*This story was amended on 18/12/2018 to clarify JCRA’s role as advisor during the creation of MORHomes