In the first in a series of articles on how to operate in the capital markets, Addleshaw Goddard’s Beth Collett looks at funding options, including the key differences between a public and private approach
In an age of increased pressures on development, reduced grant funding and reduced availability of bank borrowing, the capital markets have provided a much needed funding option for housing associations.
The long-term, fixed rate and secured nature of debt issued by regulated (and low risk) associations have proved to be an attractive investment option for traditional UK institutional investors.
Capital markets issuance is broadly split between public issuance and private placements. As the names suggest, this categorisation is by reference to the marketing process by which investors are found.
However, the distinction is much broader than this, covering issue size, documentation, covenants and investor relationships, among others.
Public bond issues are typically issued by means of an investor roadshow, listed on a stock exchange, cleared through an electronic clearing system and rated by external rating agencies. The investor roadshow gives issuers the opportunity to present their offering to a large group of potential investors, which is needed to ensure sufficient interest in larger issues and to create pricing tension to get the best pricing.
The listing, clearing and rating requirements are driven primarily by investor expectations (in addition, in the case of the listing, to tax requirements).
The main investor facing documents are the offering document (often referred to as a prospectus) and the investor presentation.
The contents of the offering document are prescribed, in part, by the requirements of the relevant listing authority (both specific requirements and a general obligation to include all information that is necessary to enable investors to make an assessment of the issuer and the bonds).
Broadly, this will include disclosure about the issuer (and any other obligors), risk factors relating to the issuer, its industry and the bonds, the conditions of the bonds, tax disclosure and selling restrictions.
The conditions of the bonds will be presented to investors as a fait accompli (subject to the inclusion of pricing information) on the basis of discussions between the issuer and the managers, with a view to ensuring that these will be acceptable to a sufficiently wide investor base whilst also being acceptable to the issuer.
Private placements, in comparison, are issued following direct discussions with investors. This can either be as a result of a prior relationship with a particular investor or, often, following an introduction, or a bidding process arranged, by an arranger.
Where an arranger is appointed to solicit investor interest and bids, this is typically done on the basis of a proposed termsheet or even a draft of the relevant documentation. However, in either case, investors will have the opportunity to negotiate the detail of it.
The form of the documentation is very different from that of a public bond issue, with bonds being issued by means of a note purchase agreement signed by the issuer and each of the initial purchasers, and with no requirement to produce an offering document.
This is reflective of the fact that the bonds will not be listed and will not be cleared through an electronic clearing system, instead being issued in registered form directly to the investor.
Given that there is no overlap in the form of documentation required for public issues and private placements, it is important for issuers to consider which is the most appropriate route to the capital markets prior to lawyers putting pen to paper.
One of the main deciding factors is the proposed issue size. As a general rule of thumb, if an issuer is looking to raise less than £100m, a private placement may be more appropriate. Conversely, if an issuer is looking to raise more than £100m, a publicly marketed issue may be more appropriate.
That said, there is no minimum/maximum in either case and bonds can be privately placed for £150m or more, or publicly issued in amounts of less than £70m. Where the issue size could tip it either side of the line, there are a number of other considerations which will play into the decision as to the right route:
Choosing the right approach from the outset will clearly avoid wasted cost and time later down the line.
Beth Collett is a partner in the banking team at Addleshaw Goddard. She will be speaking at today’s Social Housing Finance Conference in London