A new housing association funding company issued its highly anticipated maiden bond deal today (12 February 2019), with a 19-year £250m transaction at a final spread of 190 basis points over gilts.
The all-in cost on MORhomes’ groundbreaking issuance is 3.476 per cent, with the bonds maturing in February 2038.
MORhomes was formed in June 2018 and now has 62 housing association sponsors, which are also shareholders in the limited company.
The bonds – which received £425m in orders, making them almost twice oversubscribed – carry a 3.4 per cent coupon, paid semi-annually.
The issuance was done via the company’s sterling Social Bond Programme and comes almost a month after MORhomes undertook an initial investor roadshow in mid-January.
On 11 January, the aggregator had announced that it had mandated Barclays, JP Morgan and Morgan Stanley to organise a series of fixed investor meetings.
At 190 bps, the final pricing is well above the 100 bps that was originally talked about when the company was being created in 2017. The debut issuance was initially scheduled for April or May 2018.
It is also understood that borrowers will need to pay around 10 basis points in fees and the costs for the interest for the subordinated debt within the aggregator structure.
Borrowers in the inaugural bond include A2Dominion, Aster, EMH Group, Hendre, Local Space, Melin Homes, MHS Homes (through its registered provider Heart of Medway), Pobl and South Yorkshire Housing Association.
Neil Hadden, chair of MORhomes, said today: “After two years’ hard work by MORhomes, its advisors and its inaugural group of borrowers, I am thrilled to see this project come to fruition.
“It shows that the sector continues to innovate in finding new ways to access the funding to support the development of new homes.”
He said the benefits of the structure “have a real impact on the overall cost of financing – over and above the headline rate – and the resources required to raise funds”.
This includes flexibility on types of security offered and efficient use of security, including an 18-month grace period on charging security.
Patrick Symington, chief executive of MORhomes, said that the organisation had seen more than 50 investors ahead of the launch.
He said this deal was the “first stage” for MORhomes in opening up a new approach to housing association funding, adding that MORhomes had reached a number of smaller social impact investors along with some larger funders who had been “very supportive” of the new structure.
Asked about the difference in pricing from the 100 bps originally talked about, Mr Symington said: “The market has definitely moved and spreads are much wider. [100bps] is our ambition, but we’re not there yet.”
Despite it being a “difficult market”, he said the timing was right, with gilt yields within one basis point of a 30-month low.
However, he said MORhomes had to pay a 20-30 bps new issuance premium on the deal, and that the pause after the roadshow was to field the questions about the structure.
“It’s a new concept that we took on a roadshow. There were a number of questions, so we answered them.
“It’s definitely an innovative thing that we have done here, particularly with the capital structure, and it required a bit more explanation than we anticipated.”
He added that MORhomes would be looking again at the 18-month unsecured element of the structure because of the reaction of investors during the roadshows.
The pricing for MORhomes compares with The Housing Finance Corporation’s new aggregation vehicle Blend Funding, which made its debut issue in September with a 29-year deal priced at 158 bps above gilts, and a re-offer cost of 3.45 per cent.
In January, MORhomes was assigned an A- long-term issuer rating with a positive outlook by credit ratings agency Standard & Poor’s (S&P). Its £5bn Euro Medium-Term Note senior secured debt programme received an A- along with an A2 short-term issuer rating.
S&P said that while the company’s “start-up status” is a rating constraint, the agency’s view for the next few years factors in the company “delivering on its mandate and significantly strengthening its operational capacity”.
It said that a plan to raise £1bn a year in the debt capital markets would enable MORhomes to increase its share of the market to about 25 per cent in the next two years.
In addition, S&P said that it expects the vehicle’s approved policies and governance standards “to ensure conservative risk management” and continue supporting its assessment of “a strong financial profile”.
Last week, Social Housing reported that the issuance had paused a fortnight after that initial roadshow, with MORhomes understood to be in negotiations with both prospective funders and borrowers.
Its advisor is JCRA, whose director Adrian Bell helped to construct the company, while Allen & Overy and Devonshires are among the legal advisors.
This story was updated with further comment on 12.02.19