A company that will be owned and run by housing associations is targeting a £1bn debut bond issue in the spring.
MorHomes has appointed a chief executive and board members and is planning a record issuance for the sector this April or May.
Subject to launch, MorHomes intends to issue £1bn every year thereafter and could also be interested in partnering with the UK government on whatever form its next wave of financial guarantees takes.
Patrick Symington – formerly finance director at First Wessex – has become interim CEO at MorHomes, with Neil Hadden – outgoing chief executive of Genesis – as chair of the board.
Other housing names on the non-executive team include Ann Santry, Matthew Bailes and Rob Young, while it has also recruited from the utilities and financial services, with Malcolm Cooper and Peter Shorthouse.
The company - whose plans were first reported by Social Housing in June 2017 - is being created, owned and run “for the benefit of housing associations”, having reached this stage under the guidance of JCRA’s Adrian Bell.
MorHomes now has support of around 40 housing providers, who will be founding shareholders and whose equity will be used to enhance the company’s credit profile as it raises debt. Backers include Sovereign, Genesis, A2Dominion, Torus, Accent, Southern, Gentoo, Liverpool Mutual, Aster, Forviva, Karbon and Halton.
Leveraging the pooled credit of its members, it plans to establish a secured European Medium Term Note (EMTN) programme to issue medium-to-long-dated bonds which it can then pass onto associations as loans. The EMTN structure has already been adopted by large associations such as Places for People, A2Dominion and Clarion Housing Group.
MorHomes is promising better pricing than is currently available to associations by appealing to a wider group of institutional investors, along with a platform that offers instant access and reverse enquiries from funders.
The debt will be used as HAs ‘deem fit’, which could mean for new social housing, refinancing, on-lending or investing in market activities.
Along with the pricing, the company says it will offer efficient and flexible asset security and the ability to charge properties up to 18 months after an issuance.
MorHomes would be the sector’s third aggregator, joining The Housing Finance Corporation – the non-profit aggregator that has provided funding to the sector for three decades – along with smaller for-profit firm GB Social Housing.
Speaking to Social Housing this week, Mr Hadden said: “As Social Housing recently reported, the sector has committed £24bn of money to new development [and major works] and a lot of that has not yet been raised, so the demand for money is very high – and that’s not including refinancing programmes some associations are undertaking.”
Mr Symington said the aim is to attract more and new investors into the market by issuing multi-tenure debt that is ‘index eligible, liquid and tradeable’, adding that there is “a need for a new approach to raising money in the capital markets”.
“We don’t think housing associations get the best deal from the financial markets at the moment. “There are other sectors that get better deals and we want to be a better credit proposition.”
He said the security structure and flexibility of covenants, speed of access and mix of size and maturity are all attractive to borrowers – but price has been the “main driver” for the support to date.
The biggest challenge for a new entrant like MorHomes in this sector is ‘corralling people’ and giving them confidence that it will happen, added Mr Symington.
But sponsor HAs are all investing £20,000 each, which will be capitalised and used as £0.8m equity to help enhance the credit.
The money will be kept within the company and equity will continue to be built up, with plans to pay out dividends to shareholders from year three. Any new housing association borrowers will automatically subscribe for additional shares in proportion to their borrowing.
£1bn bond plan
Mr Symington said the plan is to issue £1bn all at once and at a single maturity, between 10 and 30 years.
Thereafter, MorHomes is intending to issue debt in tranches as low as £10m. It will lend to associations down to 3,000 units in the first instance, but is not ruling out providing debt to smaller organisations, added Mr Hadden.
Mr Symington said he expects MorHomes to price ‘in the order of 30 basis points better’ than HAs’ average own name issuance, and even better against private placements, which tend to return higher spreads.
Mr Bell told Social Housing last year that the aggregator is seeking at least an A+ rating to secure the pricing it desires, at gilts plus 100bps or lower. Investors have told Social Housing in the autumn that a low A to bbb rating is likely to impact pricing and demand for HA debt.
L&Q - which has typically been one of the strongest performers in the capital markets - issued £500m this week, including a longer-dated £250m tranche at a spread of 135bps, which was 30bps out from a similar issuance in summer 2017. L&Q is rated A3 with a stable by Moody’s, and A+ with a negative outlook by Standard & Poor’s.
Mr Symington and Mr Hadden said the credit rating is “not the be all and end all”, with various mechanisms in place to enhance the credit and appeal to investors. Mr Hadden added that MorHomes continues to work on a rating and that they remain confident it will equal some of the best in sector.
He rejected suggestions that the company’s rating would reflect the lowest-rated borrower, adding that it ‘does not look at the underlying credit of the borrowers’. Genesis currently has a baa2 rating from Moody’s.
MorHomes’ proposed bonds would be listed on the London Stock Exchange, while the company remains a private entity.
Mr Symington said they would need to revisit the members to finalise their appetite for debt, adding that those that join in early will share the benefits. He said part of the attraction is that after the one-off costs are paid to set up the EMTN, ‘all other costs will be lower’. The company says the all in cost of new issues - including fees - will be 0.55 per cent flat, including the equity. Mr Hadden added that the company is not a project-specific funding vehicle.
“Our starting point is that HAs can use the money they raise from us as they deem fit,” he said.
JCRA – which takes a fee for the work it has done to date and continues as financial adviser - intends to increase competition among arrangers by creating a panel of arrangers in the form of a six to eight dealer group, who would be ‘rewarded’ for introducing new investors.
The company structure offers three levels of credit enhancement, including the senior debt EMTN programme, equity and subordinated capital (see chart, above).
It is promising a ‘non intrusive’ approach to due diligence, but will keep it ‘transparent and simple’, rating borrowers between levels of one to five. Mr Symington – whose role becomes permanent after launch - said up to 50 per cent of the security can be non-traditional social housing, such as shared ownership, supported housing, care homes or offices.
Asset cover ratios will be “up there with the best of them” at 1.05x EUV,-SH 1.15x MV-T, 1.5x open market. There will be annual desk top valuations and five-year full valuations. The EMTN will aim to offer speed of access for borrowers, at two weeks or less from notice to issue.
There will not be any corporate financial covenants or "vexatious operational covenants", such as around on-lending. It is also promising simplified loan documents and a transparent and predictable credit policy.
The structure includes a borrower advisory board, chaired by Dean Tufts, of A2Dominion, which will be a ‘sounding board’ for the borrowers and help steer the types of transactions member want to see. Any of the no executive team with links to participating HAs in any issuance will not be involved in decisions that relate to those organisations’ applications.
There have been initial discussions with the social housing regulator, but Mr Symington and Mr Hadden said the limited company would not be subject to housing regulation and it is for the individual associations to decide where they source their funding.
In the event of a borrower falling into financial difficulty, Mr Symington said MorHomes has features such as a liquidity facility, and that the company would be in a “much better position to bear a shock” than an individual association would. JCRA have acted as main financial adviser.
Allen & Overy have advised from the funder side; Devonshires have advised on the HA side. RSM is providing the company with administration and accounting services, with Wedlake Bell providing governance and legal advice.