Queens Cross Housing Association sits in the north-west of Glasgow, covering a focused geographic area from the edge of the city centre to Westercommon a mile or so further north. In 2012 it grew to 4,400 units, adding some 2,000 units as a result of a stock transfer from Glasgow Housing Association, and had a loan debt of £41m in January 2019.
Like many community-based associations in the west of Scotland, Queens Cross has a governance structure that puts community members and tenants at the centre of decision making.
Queens Cross has also continued to develop in the period since the credit crunch, adding 565 new units (421 rented and 144 for sale) since 2012 – a 10 per cent growth.
Within this context the association had also been working with Glasgow City Council and Scottish Canals on the proposed regeneration of the Hamiltonhill area of the city, where 600 new homes (304 for social rent), were proposed. This opportunity would require additional loan finance of £22m to support this development – while other, smaller opportunities were also being looked at.
Break from tradition
We had been considering our refinance options for some years, mindful of the potential development proposals, and had been supported by consultancy Aquila Treasury & Financial Services (ATFS) across the period.
At an early stage, we began to look at finance options other than the traditional bank route, which our board was much more familiar with. At this time in Scotland, the use of bonds – whether via aggregators or private placements – was very rare, with only a few examples to show the board.
It was important given the relative newness of the approach to outline the advantages of the process and provide assurance at an early stage. As mentioned, the board reflects our community-based ethos, and although we do recruit board members with areas of specialist knowledge such as finance, it was important to convey to the full board the advantages of the process.
Over the period of our preparation, other Scottish associations such as Albyn Housing Society and Kingdom Group were completing their placements, which gave the board assurance on the process and the professional support available. The legal support and advice from Harper Macleod was valuable throughout the process.
In particular, we needed to emphasise to board members the changes within the traditional bank market and why the old 30-year amortising loan that they were familiar with wasn’t an option.
We also needed to make them aware that some routes may not be fully available to us, because of the relative scale of our funding need. A total finance need of £70m and £22m-plus of new debt for the association was a lot of money – but was relatively small within the wider context of the housing sector. And we needed to explain why some of the existing debt, which had reasonable margins, had to be collapsed back into the overall pot as part of the process.
Although the margins on the existing loans were good, covenants around interest cover and gearing reflected outdated accounting rules and would not allow us to borrow the level required for the new scheme. The plan was to simplify the portfolio to two bank lenders.
The board saw bond finance as an excellent match between our long-term borrowing need for social housing and a potential investor’s long-term investment need.
Supported by ATFS, we presented a proposed finance structure to the board in autumn 2017.
This proposed a single private placement bond of £40m, supported by revolving credit facilities (RCFs) with two existing lenders, repaying up to £10m of loan debt with one existing lender. This provided for stable long-term debt, matched with shorter term 10-year facilities.
At a time when the Hamiltonhill project was less advanced, the board was anxious to know our ‘plan B’ if that project did not progress. We were able to show that the long-term funding matched our existing asset-backed debt and that, were this to happen, we could minimise the use of the RCFs.
A private placement route was selected, as it was seen to provide us with the most control over the timescale and terms compared with using an aggregator bond, and we had been assured that the sum involved would be of interest to a potential lender.
We had similarly discounted a public bond issue because of the scale of need and the additional requirements, such as credit rating, that may be needed.
With a proposed finance structure and procurement process agreed, it allowed us to undertake this process and come back to the board in spring 2018, with proposed terms on the RCF elements and proposals on the private placement process.
We selected NatWest Markets to support the bond issue. The company, alongside ATFS, helped us to prepare for the investor presentation process in the later part of 2018 leading up to the presentations in December.
At the same time we were finalising the RCF facilities, which were agreed and in place by January 2019. It has been good to retain the relationship with some existing lenders on this flexible shorter term debt.
Following the investor presentation day – a challenging but interesting process – we were delighted to secure funding from M&G, which completed in February 2019. The bond was fully drawn in February and with the development cost to be funded being phased across the next two years, cash management is going to be important. Our preference may have been for a split deferred drawdown but the size of drawdown limited this possibility.
We felt that M&G understood the nature of our business well and that we would be able to develop a good working relationship. M&G was able to restructure an element of amortising debt within the overall sum of £40m; £25m is repayable over the last five years of a 22-year term, which the board had expressed an interest in doing.
Reflecting back now that our development plans are progressing, I see the overall process as being wholly positive for the association.
Beyond the availability of the new credit facilities and updating the association’s loan and covenant structure, it made us assess and consolidate our understanding of our business plan and has strengthened our relationships with our funders, both old and new.
Neil Manley, director of finance and corporate support, Queens Cross Housing Association