Network strikes £175m funding deal with six North American investors
London-based housing association Network Homes has completed a £175m funding deal with six North American investors.
Picture: Getty
Sharelines
The private placement, which completed yesterday (15 January 2019), includes a £25m unsecured slice, and terms ranging from 12 years to 35 years.
Pricing varied from 2.94 per cent for £19m of 12-year debt, to 3.52 per cent for 15-year £25m unsecured notes, and 3.65 per cent for both £47m of 30-year and £38m of 35-year debt.
Five of the investors were from the US, with the sixth from Canada. One investor was new to the sector.
The money is provided in pounds sterling, and exchange rate risk will sit with the investors. The placement was arranged by Japanese bank Mitsubishi UFJ Financial Group (MUFG) through its UK and US offices, where it has completed similar structures in other markets such as infrastructure.
Barry Nethercott, former executive director of finance and governance at Network Homes – who has since joined Sovereign as its interim chief financial officer – said the North American markets “have been showing keen pricing and excellent flexibility of approach of late”.
He said the deal for the 21,000-home, Wembley-based provider was twice oversubscribed at the preferred rates.
He said part of the focus was “to smooth out our debt repayment profile by creating a good range of maturities, focusing on time points where we had little else to repay”.
The money will be used to support Network’s development programme and its pipeline of 3,000 homes, which includes 1,752 homes starts in London by 2021 through its strategic partnership with the Greater London Authority.
Looking overseas
Mr Nethercott said the association initially heard differing views on the appetite of the US private placement (PP) market to invest in this size and type of deal, with some longer maturities and some unsecured debt, before MUFG took a different view before arranging through MUFG Securities Americas.
Helen Evans, chief executive of Network, and Mr Nethercott went on a series of roadshows in London, New York, Boston and Los Angeles in the space of four days in November.
Mr Nethercott said concerns about the impacts of Brexit played a part in the timing, however it was driven by Network’s funding need.
He said the investors also had a good understanding of UK social housing and were generally “unconcerned” by the UK’s planned departure from the EU. The roadshow also took place as the Nasdaq fell on the back of weaker forecasts by tech firm Apple.
“That was something they were quite keen to talk about. They seemed mostly quite well-informed on Brexit… and relatively unconcerned about what a no-deal Brexit might do.”
Mr Nethercott suggested that more of the bigger associations are looking beyond the “saturated” sterling bond market, where there are a finite number of active investors.
“I’m not saying the sector will reach saturation point, but investors are only going to want to put so much into one sector,” he added.
“People need to start to move on a bit from what are fairly pre-conceived ideas of doing a set size of deal with UK corporates.”
The structure on the placement also avoids a large bullet repayment that a benchmark own-name bond would require, he added.
A pool of social housing properties was pledged for the unsecured element, but Mr Nethercott said that there were no significant differences in terms of covenants and that the bilateral relationship would be managed through MUFG.
The investors take on foreign exchange or currency risk, which is built in to the price. However, the FX risk would switch to Network should it decide to break or repay any of the private bonds early.
Mr Nethercott also pointed to the 30 and 35-year debt being the same price, which he put down to the US market typically lending between 12 and 20 years.
Investor appetite
Mark Wells, head of structured debt capital markets at MUFG in EMEA, said the circa $80bn US PP market, where around 15 per cent relates to UK issuers, is “easily able to deliver a transaction equivalent to a sterling benchmark deal”, adding that the market has seen transactions in excess of $1bn for the right deal. The average deal size in 2018 was around $280m.
He said US PP investors – typically pension funds and insurance companies – are “always looking for alternative options”, and will be at the Private Placements Industry Forum in Miami this month engaging with investors on the opportunity that the UK social housing sector provides investors.
“The sterling bond market is not the broadest and can be dominated by a certain number of investors, so we are extremely keen to bring in alternatives and expand competition within the overall funding market for the sector.”
He added: “It’s fair to say the sector has been fairly consistent in the way it has accessed the capital markets and there’s an element of nervousness in being the organisation that tries something different – there’s more risk if something doesn’t go so well.
Mr Wells said that there is “cross-party support” for social housing in the UK and that he did not expect Brexit negotiations to affect US investor appetite.
“People are watching and waiting. We think there will be a little pause and after a bit more certainty around the direction of travel, I don’t think we’ll come across a roadblock for issuance.”
He said the US PP documentation can be likened to a bank loan, adding that investors would respond to changing dynamics in the sector in the same way as any lender.
The registered provider’s legal advisors were Winckworth Sherwood and Morrison & Foerster (UK). The funders’ valuation was done by JLL and the funders’ legal advisors were Greenberg Traurig and Addleshaw Goddard.
RELATED
- © Social Housing
- All rights reserved