Southern issues £200m of bonds at 158bps and all-in cost of 3.615%

News15 Oct 2018Luke Cross

Southern Housing Group has issued £200m at a spread of 158 basis points over gilts and a coupon of 3.5 per cent, with another £100m retained for later sale.

The bond forms stage two of a refinancing that has been 12 months in the making with a view to creating a “very clean, simple and cost-effective funding structure”, according to James Francis, group finance director.

The 29-year bonds were issued via the parent group and priced over the UKT 1.5% 2047 gilt, with an all-in cost of 3.615 per cent and all bonds fully secured at either 1.05x EUV-SH and 1.15x MV-ST.

They had been assigned a credit rating by Moody’s of A2, in line with the group’s issuer rating.

Bookrunners for the bonds were HSBC, Natwest Capital Markets and Lloyds.

Mr Francis said the aim had been to engage with a wide group of investors and support plans “to grow the number of good-quality affordable homes we provide and support our support our long-term financial health”.

Southern had already been renegotiating its loan agreements with six main bank lenders, with a view to increasing the group’s financial capacity for long-term investment and headroom “in line with the board’s risk appetite”.

Mr Francis added that “we were pleased with the spread which helps move our average cost of funds inside four per cent”.

The group went to the capital markets in 2014 with a bond that had two tranches, a forward fix and a single investor. Mr Francis said last week’s issuance was seen as its “debut” to the wider investor community.

During the roadshows, he said investors were focused on areas including development and sales risk, health and safety, and Universal Credit.

Southern was one of the original sponsors of the new sector bond aggregator MorHomes, but has left the project. MorHomes has more than 40 sponsors and was originally expecting to issue £1bn of debt in June.

Mr Francis said the aspirations of the two parties had begun to diverge and that Southern wanted to go out to the capital markets “in its own right to support the future strategy of the organisation”.

Rothschild and Newbridge Advisors acted as advisors, with Devonshires providing legal advice to the housing association. JLL performed the security valuation, while Addleshaw Goddard acted for the investors.

Refinancing project
By 31 March 2018 the group had total facilities of £892m, of which £723m was drawn.

However, Southern’s debt is set to rise to £1.2bn by 2021 to support plans to expand its delivery programme from around 400 to around 800 homes per year. The additional 1,200 new and acquired homes means the size of its stock will swell by more than 13 per cent.

That first stage of the refinancing project completed at the end of May 2018, with a new group-wide gearing covenant increasing capacity and a widening of its on-lending restrictions, which it said allowed significant flexibility for future group investment.

On-lending was at around £33m at March 2018, including £27m to Southern Space, which develops properties for outright sale to generate cross-subsidy for the group. It has a one-third share in Triathlon Homes LLP, which owns and manages more than 1,300 affordable homes at the East Village, the former Olympic Park.

The refinancing also saw the group remove all of its £100m standalone derivatives and shorten £30m of embedded fixed-rate swaps. The free standing derivatives had a mark-to-market exposure of £38m at the time, in April 2018, collateralised with security.

The accounts reported that the standalone swaps were traded at £3.6m lower than the balance sheet liability, while the embedded swaps were shortened at a cost of £5.1m, resulting in a net cost of £1.5m.

Another aspect of the project has seen Southern bring in three new lenders, including Mitsubishi UFJ Financial Group, HSBC and Barclays. The group now has a third of its debt as revolving credit facilities, with the rest as long-dated fixed-rate borrowing.

It still has £1.3bn of unencumbered stock for future borrowing.

Mr Francis would not be drawn on the specific costs of the refinancing project, but said that there was a value for money case approved by the board for it to equate to “low single-digit thousands [of pounds] for every additional home we could provide”.