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Sovereign strikes £250m unsecured club deal with five lenders
Sovereign has completed a groundbreaking three-year £250m unsecured revolving credit facility (RCF), with a syndicate of five lenders.
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The deal comes as the 58,000-home provider seeks additional flexibility to navigate uncertainty on the back of the UK’s departure from the EU, while supporting a move to more land-led development as it looks to grow new build to 1,900 homes per annum from this financial year.
The loan agreement took four to six weeks to secure with the syndicate, led by NatWest and including Lloyds, MUFG, National Australia Bank (NAB) and SMBC. The three-year RCF also has two options to extend by 12 months at a time, taking the prospective maturity to five years.
Barry Nethercott, interim chief financial officer at Sovereign, told Social Housing that the unsecured RCF was done at pricing “comparable to five-year secured money”.
While Sovereign already had undrawn loans totalling £370m, Mr Nethercott said that the new facility provides further flexibility and headroom in uncertain times, while also allowing the group to be more selective about its next foray into the debt capital markets.
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He said: “We have an ambitious strategy, to take control and build more affordable homes, to invest more in our existing properties and communities, and to become leaders in customer service.
“To achieve this we need the fast and flexible access to finance offered by this new deal in order to keep building much-needed affordable homes through potentially uncertain times ahead.”
The deal was arranged by Centrus, which negotiated on Sovereign’s behalf.
Phil Jenkins, managing director at Centrus, said it is an “exciting and innovative transaction which delivers large-scale, unsecured bank facilities on competitive terms”.
It is also the latest in a string of new structures and entrants in the sector. Mr Nethercott agreed a blended private placement with six US investors for Network Homes before joining Sovereign. Sovereign was also the first to secure a facility from new-to-sector bank NAB, and now welcomes MUFG onto its lender panel.
Centrus recently advised Home Group on a bridging loan as part of its risk mitigation and capital markets strategy.
Mr Nethercott said the unsecured approach “offers comfort” in mitigating uncertainties in the coming months in relation to Brexit.
It means the group can also be “nimble” in its approach to buying sites and deploying cash. It opted against a bridging loan, after securing pricing comparable to a five-year RCF.
Mr Nethercott said that Sovereign – rated A2 by Moody’s and A+ by Standard & Poor’s – also wanted to use a syndicate of lenders to avoid exposure to a single bank. “It’s always on our list to monitor the credit of who we are doing business with.”
Sovereign’s build plans
1,900
New homes per annum (from 2019/20, vs previous plan by 2023)
80-90%
Proportion that will be affordable (social/affordable rent, shared ownership)
1,543
New homes built by Sovereign in 2018/19, up 30% on previous year
The club approach involves single, consolidated loan documents, which makes management easier and more efficient.
There are no additional covenants beyond the standard gearing and interest cover agreements.
It does include an unencumbered asset test, which means Sovereign needs to have security available.
“Because it is short term, it is not particularly likely that we will want to change any terms in that period,” said the chief financial officer. “If there were a merger on the cards or cause for us to want to change something, we have got a fair degree of flexibility in the loan terms.”
He added that one bank went as far as making a policy change so it could be included on the deal.
Mr Jenkins said part of the reason syndicated facilities had fallen out of favour was that there were legacy arrangements that were difficult to manage, whereas the Sovereign deal is a relatively short-term agreement at current market terms, which also makes the banks more comfortable and offers a “good view of the risk”.
He said the approach was “very much a Sovereign-led strategy”, rather than something led by the banks, and reflects a shift in sector dynamics to strong credits like Sovereign taking on “more of a private sector mindset in setting the basis of their financing structure and looking to bring funders along”.
Louise Leaver, partner at law firm Winckworth Sherwood which advised Sovereign on the deal, said: “With a syndicate of five lenders, negotiations on the documentation were conducted through the agent. This streamlined the process from the borrower’s point of view and reduced the need to negotiate separately with all five lenders to reach an agreed position.”
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