Together closes Salford PFI with £82.6m two-tranche bond

The 30-year project has secured £82.6 million of funding through the first unwrapped two-tranche listed bond structure for a new PFI project.

Tom Miskell, chief executive of Together HG, said they have also ‘trebled’ the scrutiny of the certification process in direct response to problems on Housing 21’s Oldham PFI scheme, which has racked up £32 million of costs.

The Salford scheme has been welcomed by HM Treasury and is the second recent housing PFI to reach financial close, following the Leeds project in July 2013.

The total unitary charge amounts to £390 million.

Investec Bank arranged the bond issue on behalf of joint venture FHW Dalmore, with £71.7 million of Class A senior secured notes at 5.414 per cent and £10.9 million of Class B junior secured notes at 8.35 per cent.

The two-tranche approach sees subordinated B loan notes offering protection to A note investors, with the debt on-lent to the borrower as a single loan at a blended margin, and a standard project finance covenant package.

It is understood Together HG had looked at a wrapped bond route.

The bond was listed on the Irish exchange, which is seen as having a quicker turnaround and tax benefits.

Together HG has set up special purpose vehicle Pendleton Together Operating Ltd, owned by its registered subsidiaries Pennine Housing and Chevin Housing Association.

The SPV will subscribe for 999 ordinary shares of £1 each and £12.5 million of subordinated unsecured loan notes, with Chevin and Pennine each taking 499 shares.

Chevin is subcontracted to deliver repairs and maintenance and the housing management.

Together HG will act as guarantor for Chevin, with poor performance resulting in unitary charge deductions.

Redevelopment has been subcontracted to Keepmoat Regeneration (Bramall), while Salford City Council remains the landlord.

Keepmoat is providing its own 12-year parent guarantee on the works, also backed by a performance bond, letter of credit and 5 per cent retention agreement.

There is also £6 million of cash reserves provided by Pendleton Together Operating Ltd.

Mr Miskell said works will be signed off by independent certifier, EC Harris, along with the Sweett Group, who are providing professional indemnity of £10 million each.

There will also be additional internal resource committed to certification checks.

Similarly to the Leeds PFI, Treasury had already rejected an earlier bank-financed proposal on a value for money basis.

Senior debt due diligence and document negotiation has been carried out by FHW Capital, formed by Glenn Fox, Severin Hiller and Alastair Watson in July 2013, all formerly of Hadrian’s Wall Capital.

Mr Watson said the Oldham PFI has made the sector ‘more wary’, but stressed they are very comfortable with the technical specification at Salford and Keepmoat’s experience.

The council’s broader £650 million regeneration scheme includes another 1,600 new build homes, being delivered outside of the PFI, in four phases.

A separate SPV has been set up, being funded on-balance sheet by Together, with Salford council putting in land.

The first £30 million phase is underway, supported by a £2.65 million HCA grant.