Opportunities for housing associations in the private placement market

This is demonstrated by the list of 2022 PP deals set out below:

While we have seen less transparency on PP terms in the last 12 months, we can identify some broad market trends over the period.

The dynamics driving pricing underwent a transformation, however. At the start of 2022, U.S. investors were exercising a downward pressure on spreads for HA borrowers, with transactions executed between 145 and 155 bps over gilts to give yields of 3.34 – 3.44%. This was within 20 – 30 bps above secondary levels for HAs in the public market.

High domestic deal flows, particularly for National Association of Insurance Commissioners (NAIC) 1 borrowers (equivalent of A/A2/A category S&P/Fitch/Moody’s ratings), meant their interest waned. When spreads available in the domestic market were translated into sterling, their pricing was uncompetitive. This left a smaller group of U.K. institutions only who were keen to lend but at higher spreads – meaning that many of the transactions completed later in the year were at yields in excess of 6%.

With a significant slowdown in new issues in both the public and private placement market at the start of 2023, these U.K. investors are significantly under lent and long cash. U.S. investors are also beginning to react based on a slowdown in NAIC 1 issuance.

As a result, both groups are showing a more flexible approach to terms, particularly on pricing and maturities. This coincides with some HAs seeking capital markets funding, but for shorter maturities as they limit commitments made to fix their debt at current interest rate levels – many are wary of locking into rates in excess of 5% for 30 years.

Debt terms at seven years and longer are the investors’ preference. Delayed drawdowns are available, with U.K. investors more open to delays extending over one year for an appropriate premium.

HA public bond issues in 2023

The public bond market for HA issues has been at its quietest for at least four years.

The Affordable Homes Guarantee Scheme (AHGS) – through Saltaire Finance (Aa3) opened the market for 2023 issuance in the sector on 8 March with a £350M 30-year issue, £100M of which was retained. It priced at gilts + 63 bps, tightening from an initial price talk (IPT) of 70 bps and closed with a book of £870M (~3.5x oversubscribed) based on the £250M sold.

East Midland Homes (emh) also completed a £50M retained bond sale on their 2044 bond in March, advised by Chatham Financial.

These were the only two public issues over the quarter.

Pricing considerations

1. U.K. investors
   1. Bidders on the emh transaction included U.K. PP investors who entered the year with considerable liquidity but were under-lent (long cash) through the first quarter and willing to provide liquidity for a public retained bond sale as a substitute for PP transactions. Bids represented premiums to the secondary market spreads of c. 5 – 7 bps for a 21-year issue. The two tightest bids came from PP investors – suggesting PP pricing is now largely flat to the public market for higher quality credits.
   2. While there is openness to shorter maturities, some investors are looking for wider spreads to compensate for a loss in yield due to the shape of the yield curve. This has led to a slightly counterintuitive outcome, with credit spreads likely to be wider for shorter maturities compared to mid-term maturities. This raises the question of how long borrowers are looking to fix their debt, if shorter- and medium-term issues carry comparable all-in costs.
2. U.S. investors
   1. U.S. investors benchmark pricing for HA deals relative to U.S. utilities with a NAIC rating of 1. The pricing outcome is then impacted by the benefit or cost created by the cross-currency swap.
      
   2. In the tables below, we set out our expectations on pricing, alongside an analysis of how this compares with the cost of borrowing through the bank market – with an embedded swap attached. These assume an A/A+ rating, ensuring an NAIC 1 standing in the U.S. PP market.

* As of 30-Mar-23

** U.S. investors lend in sterling. Pricing is impacted by currency and swaps.

*** % of notional. Amortised over life of the facility.

* Assuming bullet repayment

** As of 30-Mar-23

To provide an indication of comparative value, below is an analysis of where U.K. utilities have priced in the public market so far in 2023. There have been at least two comparable credits (Motability and NATS), while other utilities have also issued. A notable point from these issues is the reduction in new issue premia (NIP) relative to last year where they ranged between c. 15 – 25 bps.

* Initial price offering

** New issue premia

Other considerations

Covenants

An increased number of borrowers, especially those with legacy facilities with restrictive interest cover covenants, are exploring renegotiation conversations with their PP investors for a move to EBITDA-only.

Results vary among lenders. Where amendments have been agreed, it may be accompanied by a side letter which includes temporary waivers and an increase in the coupon until certain conditions are met.

Where an amendment is not feasible and borrowers have excess liquidity, they may consider refinancing. This has become more attractive over the past year as interest rate rises mean lower redemption values – though for PPs this is usually par floored (i.e., minimum repayment amount equals par value).

Please reach out to us for further advice on this and / or assistance in renegotiation discussions.

Benefits of a private placement

• There are no limits on issue size. Facility sizes of c. £40- 150M are typical.
• Each issue may consist of multiple tranches with different drawdowns and maturities which makes it difficult for any investor to have pricing power.
• Deferred drawdowns for a year are common and out to 3-4 years are possible, though premiums will apply.
• Unsecured funding available from U.S. investors at little additional cost.
• Opportunity for greater covenant flexibility relative to the banking market.