Housing Treasury Financing Risk

Transcription

1 Housing Treasury Financing Risk B5: Key developments in the bank lending and private placement markets Speaker: Chair: Phil Jenkins Partner Centrus Advisors Paul Jackson Treasury Independent

2 Housing Treasury Financing Risk B5: Key developments in the bank lending & private placements markets 23 October 2013 T R E A S U R Y & D E R I V A T I V E S D E B T A D V I S O R Y P R O J E C T F I N A N C E C O R P O R A T E F I N A N C E

3 Update on Banking Market for RPs Continued improvement in sentiment and bank funding costs during 2013 Reflected in reduction in margins where new 3-5 year facilities are concerned and some appetite for longer maturities, out to 7-10 years Prudential Regulation Authority published views around setting a floor to Loss Given Default (LGD) which could impact RP borrowers. The PRA has considered representations in this area including potential impact on RPs and is undertaking a more thorough review with the outcome expected some time in 2014 Negotiations with lenders around restructurings and covenant negotiations remain slow and difficult but with greater willingness on both sides to compromise. Restructuring costs have reduced as a result of lower cost of replacement long term institutional debt New entrants into market both at small and large end 3

4 Desired Outcomes: A Divergence of Views Borrower Objective How can we protect the embedded value in existing loan arrangements and any other advantageous commercial terms? Divergence remains but the gap has reduced over the past 6 12 months Engagement with Lender(s) requires careful planning & implementation beforehand Lender Objective How can we use this to renegotiate the existing loan(s)? Margin Term Prepayment Hedging Fees Asset Cover Covenants Restrictions Bond Mandates 4

5 Factors Driving Economics of Restructure Factor Restructure Parameters Starting point has loan already been repriced or not? Degree of covenant headroom sought will lenders see a 2 nd bite of the cherry? Strength of existing lender relationships Embedded hedging which may limit scope of prepayment Clarity around legal position where consents etc. concerned Availability of a robust Plan B and a willingness to follow through with it Dynamic of margin increases vs prepayments (cost of replacement debt?) Expected life i.e. how much value do you ascribe to latter years? How to deal with syndicated arrangements? Clear understanding of the costs associated with hedging restructures Ability to consistently compare proposals involving materially different terms What can borrowers put on the table e.g. ancillary business 5

6 Illustrations of Recent LSVT Restructures LSVT 1 LSVT 2 LSVT 3* Deal type Full LSVT covenant removal Full LSVT covenant removal Full LSVT covenant removal Prepayment (as % of original facility) 35% 25% 0% Original margin c.30bps c.90bps c.35bps Renegotiated margin Cost as % of original debt c.100bps c.140bps c.200bps 11% 8% 19% *LSVT 3 Centrus has subsequently been appointed to seek improvement to terms since receipt of original offer 6

7 Summary Around Bank Negotiations Key issues from borrower perspective Clarity around legal position Development of credit story (e.g. around mergers) Development of a clear lender engagement strategy (specific to each lender) Do you have a credible Plan B? Is it aligned with corporate strategy Are you prepared to follow through with it if necessary? Quantification Are you able to quantify complex restructures often involving hedging? Do you have sufficient access to market information in order to benchmark proposals? Mergers Some thoughts around the path of least resistance 7

8 Private Placements: An Evolving Arena UK investor market continues to adapt to the post-bank dominated funding environment Public bond issuance now well established with investors looking through credit ratings in terms of pricing differentiation Rapidly evolving market for listed and bilateral PPs as well as other formats such as retail bonds and sale and leaseback Increasing range of formats and options for borrowers RPs need to understand full range of options & where these are best applied RPs are increasingly moving away from a standardised funding model Widening investor base caters for most current forms of requirement 8

9 Market Developments During 2013* Issuer Key Features Other Comments 100m shelf facility with Pricoa Capital offering uncommitted but highly certain facility with drawdown flexibility Pricing highly competitive to public bond market where investor has appetite for the credit in question +112bps represented narrowing of previous differential between larger deals/issuers and smaller ones Bought by a single new investor to the sector, unclear at this stage whether one-off or more sustained pattern Heavily deferred structure, 1m drawn up front with 49m drawn at agreed rate in 2017 Unusual structure requiring co-incidence of needs between borrower and investor. Cost of carry savings offset by higher coupon/margin 50m retained bonds issued through innovative auction process at differential spreads Allowed Moat to tap into different levels of demand and pricing appetite as opposed to a classic clearing price via book building Unsecured structure with funding SPV guaranteed by non asset owning parent company. Rated AA- by Fitch More expensive on a spread to gilts basis than conventional funding but offers flexibility and a robust Plan B *based upon available information 9

10 Private Placement & Other Non-bank Options Question Public Bond Consideration Listed PP Agented PP All options have their place Highly dependent on borrowers objectives which are increasingly diverging S&L Retail Bond Bilateral PP Important to understand and align with investor appetite & objectives Large investors may operate across many formats 10

11 Key Drivers of a Funding Decision Issue Question Size Consideration Borrowing Frequency Credit Quality Execution Risk Credit Rating Covenant Capacity & Regulatory Considerations Security Availability Covenant Structure Consideration Of organisation and funding requirement How often are you planning to return to the market? Comparison with peers Understanding the risks of different strategies Do you want to maintain a public rating? Recourse or non-recourse solution with the latter taking on greater significance for commercial activity Is security efficiency critical? Covenanted or non-covenanted transaction? 11

12 Key Drivers of a Funding Decision Issue Question Relationship Focus Consideration Drawdown/Carry Cost Risk Appetite Transaction Structure Timing Consideration Bi-lateral or syndicated/listed arrangement? Standard or deferred structure? How comfortable is your board with contingent currency or counterparty risk for example? Bespoke or standardised? For bespoke structures you need an investor which understands credit Speed of execution required 12

13 Features of Alternative Formats Public Bond Large issuers/issue size Standard format & process Financial covenants Y/N Higher execution risk Widest investor pool Listed bond docs Retained bonds Rated Listed PP Smaller issuers/issue size Standard format Financial covenants Y/N Lower execution risk Smaller investor pool Listed bond docs Deferral options Usually rated Price tension/cost Bilateral PP Smaller issuers/issue size Complex or highly bespoke deals Financial covenants Lower execution risk Smallest investor pool Loan/NPA docs Rated or unrated Deferral options Speed of execution 13

14 Evolving Funding Market for a Rapidly Changing Sector The financing market for RPs continues to evolve rapidly in response to the changing funding requirements of different RPs We expect to see continued divergence away from standardised funding as corporate structures change in response to regulation and capacity issues Increasing need for highly bespoke funding structures which require investors with real internal credit capability Affordable Guarantee Scheme The solution looking for a problem Existing legacy bank debt and derivatives will continue a slow but inevitable unwinding and re-structuring with some forced to the negotiating table sooner than others 14

15 Questions & Discussion 15

16 Centrus Advisors LLP is an appointed representative of Pegasus Capital LLP which is authorised and regulated by the Financial Conduct Authority, Firm Reference Number Please visit for more information. Centrus Advisors LLP is a limited liability partnership incorporated in England and Wales with number OC Registered office at Fleet House, 8-12 New Bridge Street, London EC4V 6AL. The information contained in this presentation obtained from sources other than Centrus Advisors LLP ( Centrus ) has been compiled by Centrus from sources believed to be reliable, but no representation or warranty, express or implied, is made by Centrus, its affiliates or any other person as to its accuracy, completeness or correctness. This presentation is being provided to you based on our reasonable belief that you are a sophisticated institutional investor that is capable of assessing the merits and risks of the transactions and financial matters discussed herein. All opinions and estimates contained in this presentation constitute Centrus judgement as of the date of this presentation, are subject to change without notice and are provided in good faith but without legal responsibility. This presentation is not an offer to sell or a solicitation of an offer to buy any securities. This presentation is not, and under no circumstances should be construed as, a solicitation to act as securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. To the full extent permitted by law neither Centrus nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. No matter contained in this document may be reproduced or copied or passed to any other party by any means without the prior consent of Centrus. All rights reserved. 16