Notting Hill plans benchmark bond issue amid Moody's downgrade

News27 Sep 2017Luke Cross

Notting Hill Housing Group (NHHG) is setting off on an investor roadshow with a view to a benchmark bond issuance of at least £250m.

The move comes after the association was downgraded by Moody’s along with 39 other associations after last week’s action on the UK’s long-term issuer rating in relation to Brexit and pressure on public finances, including the welfare bill.

However, Moody’s pointed out that Notting Hill has also breached its own treasury policy requiring 18 months of liquidity. It has 15 months of liquidity at present.

The agency said this was due to funding not materialising as planned and being deferred because of merger talks with fellow London G15 association Genesis Housing, which saw its rating drop from Baa1 to Baa2 and remains one of the lowest ratings in sector.

UK housing associations typically receive a one-notch rating uplift for what rating agencies describe as the likelihood of ‘extraordinary’ support from the UK government in event of a financial failure.

The Moody’s downgrade on Tuesday (26 September 2017) covered 54 entities in total across the sub-sovereign space.

It included associations and 34 associated special purpose vehicles, a total of five councils, the UK government-guaranteed funding vehicle PRS Finance plc and Transport for London.

The baseline credit assessments (BCAs) – the underlying rating without the government’s one-notch uplift – of all HAs were maintained besides Notting Hill Housing Group, which was downgraded from baa2 to baa1 with its final rating moving from A2 to A3, with a negative outlook.

Moody’s said this reflects a “weakened financial management score, driven by a lack of adherence to its treasury policy sustained for several months”.

Once funding is obtained Notting Hill’s liquidity coverage ratio would recover to 1.3x in line with a rated peer median of 1.4x.

He pointed out that NHHG has always had enough funding to meet commitments and future land purchases, and that the "breach" was an internal policy issue that does not impact any loan covenants. The Homes and Communities Agency, however, does expect organisations to have 18 months of liquidity in place.

Mr Phillips said that while NHHG could have gone to the banks for money, it would have taken several months to put the facilities in place. In the meantime, the group has been getting security in place for the new bond.

NHHG is well-established in the debt capital markets, taking just a month in 2014 between decision to go and starting the roadshow.

That £250m, 40-year issuance priced at just 98 bps over the gilt and was its third public bond since July 2010.

He added that a bond also fits with any requirement for potential refinancing in relation to the merger.

NHHG has mandated Barclays, HSBC, Lloyds Bank and Santander to run the roadshows and act as bookrunners on what is expected to be a 40-year issuance.

Asked about potential impacts on pricing, Mr Phillips said: "There are some risks, but they are not great we don’t think. Investors do have money they need to put to work and we are one of the biggest bond issuers in the sector.”

The shadow board of the planned Notting Hill Genesis was announced yesterday. The organisations hope to complete the merger by the end of this year.

It was planned for Notting Hill to become a subsidiary of Genesis in the first instance, however that remains under review.

The United Kingdom’s credit rating was downgraded by Moody’s on Friday evening (23 September 2017) to Aa2 from Aa1, in relation to its exit from the European Union and continued pressure on public finances.