A small BME housing association based in the East Midlands has secured a deal in the debt capital markets during an unprecedented period of volatility.
Tuntum Housing Association – a 1,400-home BME association based in Nottingham – completed its £42.5m up-front funding deal on Thursday last week (26 March 2020), having agreed pricing at the start of March.
The funding has been provided via Macquarie Infrastructure Debt Investment Solutions (MIDIS) – part of Australian investment bank Macquarie Group – marking its fifth transaction in the social housing sector, and taking its total exposure to £650m.
Along with the £42.5m up front, the package also includes a £50m shelf facility.
TradeRisks arranged the two-tranche debt facility, which includes a £32.5m spot tranche at a coupon of 2.743 per cent. A £10m, one-year year deferred tranche has been secured at 2.852 per cent. Both tranches will be repaid in three equal instalments in 2045, 2049 and 2053.
Gareth Edwards, associate director at MIDIS, said: “In otherwise uncertain market conditions, our financing will support Tuntum to deliver its high-quality services whilst providing the certainty it needs to grow and support more vulnerable people living in the East Midlands.”
TradeRisks said the money from a UK insurer and a UK pension fund was priced at “an attractive credit spread following bilateral engagement with a shortlist of investors”.
Antoine Pesenti, senior managing director at TradeRisks, told Social Housing: “We are still showing transactions to debt investors and they are still keen to look at them and do credit analysis.
“But we are delaying for any pricing as the market now is too unstable and so spreads are too wide.”
There was a small flurry of social housing deal activity at the start of the month, before the coronavirus outbreak caused havoc across the bonds and equities markets.
Large G15 housing association Optivo said last week that it is still awaiting a window of opportunity for a potential £250m bond issue, having seen investors during a roadshow in early March.
However, housing association capital markets deals are broadly understood to be on hold, while association credit spreads on long-dated bonds have widened by up to 95 basis points in the month to 24 March 2020, according to the latest available data compiled for Social Housing’s upcoming market digest, as gilt yields have plunged.
The public bond markets were closed for business for a period in the middle of the month, but the Financial Times reported a rush of corporate bonds activity last week following the latest monetary stimulus by central banks, including bond-buying programmes.
Tuntum – registered with the Housing Corporation in 1988 as part of the drive for new BME housing associations – will use the proceeds to develop affordable homes and refinance some of its existing bank facilities.
The facility has an asset cover covenant that steps up a year after the first drawdown, giving Tuntum additional time to provide security. The deferred structure aligns to Tuntum’s needs and reduces cost of carry, according to TradeRisks.
Junior Hemans, chair of Tuntum, said: “This is a hugely significant step for Tuntum housing association which will enable us to refinance some of our existing loans and provide us with the funds for more new homes.”
Richard Renwick, chief executive of Tuntum, added that the flexible financing package has been tailored to enable the association to complete the transactions it had planned in the short term, deliver its pipeline of development projects “and continue to make an impact on people’s lives”.
Mr Pesenti said the transaction shows that smaller, locally focused housing associations can pursue capital from large institutional investors.
“This transaction ensures that Tuntum can continue with their future development plans supported by long-term funding,” he said.
Mr Edwards added: “Tuntum has a strong and experienced board and management team, with their tenants and the community truly at the heart of what they do.
“We have been impressed with Tuntum’s commitment to support services, the great care given to the quality of its housing stock, and its approach to targeting new developments where they are needed most.”
The transaction marks the latest financial milestone for Tuntum, which saw a drop to a non-compliant governance grading in 2014 amid proposals to use a bank overdraft as short-term development finance alongside index-linked finance on an 129-unit tower block scheme, which it subsequently decided not to pursue.
The association regained compliance within a year and achieved the top viability grading, but then returned to a V2 at the same time as gaining a G1 in 2017.
The association is now rated G1/V2 by the Regulator of Social Housing.
The regulator’s narrative report in 2017 said that Tuntum was adequately funded but that a decision to increase borrowings to support its ongoing development programme had led to a high debt burden and reducing interest cover margins.
Tuntum’s 2019 accounts reported that it is targeting 279 additional homes for rent and shared ownership by 2024. It said the housing association had £8m of turnover, an £0.5m surplus and almost £45m of drawn bank loans at rates between 2.2 per cent and 9.8 per cent.
This story was updated on 31 March 2020 to include additional information from MIDIS and to remove a reference to this being Tuntum’s debut debt capital markets deal