Southern HG enters bond market with two-tranche deal

The first tranche is an £125m bond at a margin of 120 bps and all-in cost of 4.5 per cent, maturing in February 2039. 

That attracted bids from a number of investors and includes £75m that has been drawn immediately and £50m of retained bonds that can be drawn any time in the next five years.

The second tranche is a £50m bond that can be taken in five years’ time and matures in 2044.

It is already priced at 5.364 per cent and 127 bps over the reference gilt after negotiations with a single investor.

Lead advisers on the deal were Goldman Sachs.

Southern HG’s finance director Rosemary Farrar said the group had been planning the capital markets approach for around a year and did it differently by market-testing with investors.

Ms Farrar, formerly of Notting Hill Housing Trust and Circle, said the aim was to ‘get our name known’ and set out the long-term business plan to investors.

The group also spent time deciding whether to get a rating, assessing and arranging security requirements and negotiating with banks.

‘We said in order to achieve the best outcome for us going forward, we need the flexibility that your [bank] loans don’t afford – we’re not going to pay you to free up covenants, either you free up covenants or we will go out to the market and get more finance,’ said Ms Farrar.

The FD said that was agreed with all but one funder, Nationwide, and meant the group did not need to raise as much money on the capital markets as first thought.

Ms Farrar said they also wanted to retain some ‘attractive’ bank loans. The group had £745m of drawn debt at 31 March 2013 and gearing of 63 per cent.

Southern, which returned a 30 per cent operating margin in 2012/13, was assigned an A1 rating by Moody’s in July 2013.

The structure means a higher rate for the fix, but Ms Farrar said they had ‘done the maths’ and opted against the cost of carry, adding that the arrangement works for HAs with a ‘very firm’ business plan.

She added investors are ‘anxious’ about increased commercial activities as it changes the risk profiles of HAs, but said Southern has a balanced programme to deliver 300 units per year, evenly split between social and affordable rent, shared ownership, market rent and market sale.