Record-breaking bond issue marks final stage of Accent’s financial overhaul
Accent has taken its first step into the debt capital markets and achieved the sector’s best ever coupon for a long-dated own-name bond.
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The deal – pricing at a coupon of 2.625 per cent – marks the final stages of an extensive financial restructuring and follows an operational restructure and overhaul of its governance arrangements.
Chief executive Paul Dolan – who previously oversaw a transformation at Johnnie Johnson Housing Trust – said that he would not call it a ‘turnaround’, but that the extensive restructuring work has allowed the group board to have more clarity around what the housing association wanted to be and deliver.
The deal marks the final phase of a significant long-term financial transformation for Accent, which more than a decade ago consisted of up to 50 different entities, and was selling its private finance initiative (PFI) contracts.
David Royston, executive director of finance, went about disposing of a number of PFI and commercial businesses from 2006 as a means to tidy up the group while de-risking and cleansing the balance sheet.
“It was quite easy to get into those contracts but getting out of them and exiting them was quite a difficult process,” he said.
The process included selling a mental health facilities PFI business for £54m, completed in the middle of the global banking crisis, and running the exit of the group’s NHS LIFT PFI businesses for £10m.
By 2014, the group was putting in place a “virtual consolidation” and began to deliver efficiency savings, before the 2015 rent reduction would hit its income by £25m over the four years.
Restructuring and the exit from non-core activities continued in the run-up to 2016, the FRS 102 year, helping Accent to collapse the group structure and move its three registered providers into one.
During that process and discussions with funders, Mr Royston said it became clear that the group would need “significant enhancement of our borrowing capacity”, including alignment of covenants that differed across the various entities.
That financial reorganisation took the group’s borrowing capacity from £30m to more than £200m.
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Refinancing
Work in 2019 included securing consents from existing lenders, reorganising security arrangements and securing new revolving credit facilities.
The value of the security released goes well beyond a £122m loan repaid to Nationwide and the remaining £125m of retained bonds, Mr Royston said.
The group has reported a £52.8m pre-tax surplus for the year to the end of March 2019, and a £22m operating surplus, on turnover of £95m.
One feature of the 2019 results that helped Accent’s pre-tax surplus was a positive £87.6m revaluation of its stock, of which £43.3m feeds through to the bottom line under FRS 102 rules.
Accent had taken a £117m hit in 2016, following the introduction of the four-year, 1 per cent annual reduction to social housing rents, due to its stock being measured at valuation, which means a discount rate is applied to rental cash flows. This took what was the group’s best ever operating surplus of £33m or 32.7 per cent into a deficit.
Asked whether Accent is exposed to another reversal under a new government, Mr Royston pointed to this being an accounting measure and said he did not believe there would be the same risk of a rent regime as politically the sector is “in a different place”.
Accent is using the bond proceeds to pay back £122m of legacy debt to Nationwide, meaning it will part ways with the building society. Mr Royston declined to reveal the break costs at this time.
It also follows a £3.1m repayment to Dexia – including the facility and break costs – in the 2019 financial year, which is not providing new finance to the sector.
Accent has also extended credit facilities with two existing lenders, RBS and Lloyds.
While highlighting Accent’s strong financial profile and assigning the group an A+ rating, credit ratings agency Standard & Poor’s described Accent as delivering a weak financial performance in 2019 due to higher costs and repairs, which it expects to see continue into 2020, including advisory fees related to raising the bond and investments in digital systems to improve the customer experience.
It said capitalised repairs almost doubled in 2019 to close to £10m, but development plan, cost savings and the end of rent cuts will see EBITDA margins gradually increase to about 30 per cent.
The 2019 results show increased repairs and maintenance costs of £3.26m, including additional work on fire risk assessments, while the group went live with five new regional repairs and maintenance contracts.
Mr Royston said: “If you take out all of those big-ticket items, the margin would be back at 33 or 34 per cent – so in terms of setting the business up going forward, we felt it was a really important thing to do.”
Accent has also reviewed its asset management strategy, changing the frequency of bathroom and kitchen replacements at a cost of £20m over a five-year period and around £57m over the life of the 30-year financial plan, and is timed to coincide with the ending of the one per cent rent cut formula.
Development ambitions
Accent completed 78 homes in 2019, with 280 starts on site and a plan to deliver 500 annually by 2023. The group is now planning to deliver 2,150 homes over the next five years.
Like a number of other housing associations, it is moving more to land-led development and multi-tenure approaches, with less focus on Section 106, in part so that it has more control over build standards and quality.
It is the lead partner in the Accent Consortium, which delivered 173 homes in 2018/19 and started 458 homes, drawing on £11.3m of capital grant.
The group also secured funding to build 300 homes through the Homes England Wave 2 Strategic Partnership.
Almost 60 per cent of its focus is in the East of England, including the Oxford-Cambridge arc and into Peterborough.
It saw a small amount of sales income in 2019, and it has plans to increase this, but for shared ownership and private sales it will not exceed 20 to 25 per cent of group consolidated turnover on an annual basis.
Mr Dolan said that the scale of the build programme has been based around the group’s stress-testing and financial parameters.
“We are doing it in the right way, in an incremental way,” he added.
Governance review
Following an independent review, Accent has redefined the roles and responsibilities of the board, appointed a significant number of experienced non-executives and created new specialised committees, including capital investment and treasury activities.
A review of the operational delivery model also led to “a large-scale restructure, impacting on almost every operational team”, it said. Staff redundancy costs associated with a customer experience restructure reached £877,000.
The group has also estimated that there has been an increase of £250,000 on current arrears as a result of Universal Credit. As at March 2019, it had around 2,100 customers claiming Universal Credit from a potential 10,500 people.
The group said it can “reasonably expect that a further 6,400 customers will migrate to Universal Credit in the future”.
“Inevitably this is starting to impact on our rent arrears performance and we have seen our first increase in five years, albeit only 0.3 per cent.”
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