Credit Ratings & Investor Relations Henrietta Podd Head of Debt Advice & Origination, Canaccord Genuity
Credit Ratings PRIVATE & CONFIDENTIAL
Credit Ratings Introduction As a sector in the UK, housing associations are the highest rated group of borrowers outside government An increasing number of large and small associations are obtaining their own credit rating What is a rating and what does it tell you Why obtain a rating What is the right approach Is a rating essential? Where it is necessary, is it sufficient the role of Investor Relations Moody s S&P Fitch High Low High Low High Low English HAs Aa1 Baa2 AAA A+ AA AA- UK Regulated Utilities A2 Baa2 A BBB+ A BBB+ UK Banks Aa3* Baa2 AA- BB AA BBB Source: Bloomberg *HSBC Page 2
Credit Rating What is credit a rating? A Credit Rating is an opinion: An entity s ability to meet its financial commitments On time A Rating effectively shows the probability of the entity not meeting its full payments (Principal + Interest) on time 3 main Credit Rating Agencies: 13.4bn 78% 3.7bn 22% Moody s Investor Service Fitch Ratings Standard & Poor s Rating scale ranges from AAA to D, where AAA is the highest and indicates very good credit quality, while D indicates Default Housing Association ratings are heavily influenced by regulation and government support So agencies will generally conduct a corporate credit rating first and then notch up the rating to take into account the government support. Page 3
Strategic uses of a Credit Rating Why get a rating? The funding markets for Housing Associations have changed significantly since 2008 Total Long Dated GBP Issuance - 2012 The last 12 months has seen an increase in demand for Housing Association bonds in the capital markets HAs are responsible for 22% of the long dated sterling wholesale bond market in 2012 New types of funding have become available An increasing number of investors are involved 13.4bn 78% 3.7bn 22% HA Issues Other Issues Some investors tend to do their own credit analysis in any transaction, however a formal credit rating is required in some markets A credit rating will allow HAs to access funding from a variety of sources Public bond Listed private placement Private placement (not required) Retail bond (not required) Type of Funding No of deals in 2012 Public Wholesale Bond Listed Private Placement 18 Private placement 5 Retail Bond 1 2 Page 4
Benefits of a Rating The benefits and drawbacks of a rating Ratings are playing a big role in the pricing and appetite for capital market transactions The tendency towards passive management and measurement versus indices Regulation, such as Solvency II Pension discount rates A sweet spot for many investors will be bonds that are Listed Secured A/AA rated They will continue to buy this type of asset in all market conditions HAs can fulfil all these requirements The major drawbacks are The upfront work involved Rating volatility i.e. potential rating change driven by Underweighting ultimate recovery corporate activity, or regulatory or political change Given the emphasis Government support, this shouldn t be underestimated Type of deal Own name wholesale Public Bond Listed Private Placement Private Placement THFC Rating Required? YES YES Not essential No Maximises funding alternatives in all market conditions Retail Bond Not essential if secured Yes if unsecured Page 5
How to present your business Perception is Reality HAs have hesitated in the past to obtain credit ratings Intimidating process Unclear requirements Rating agencies prefer to see a Realistic version of the business plan This includes having realistic assumptions that drive the business plan While prudent assumptions are a benefit when planning for the future, a realistic version shows the credit strength of the business The following documentation is required by the rating agency: Corporate Profile & Business Strategy Details of Management and the Board 5-year business plan Treasury Management Policy and Effectiveness Waiting List for Social Housing Current Rent and Target Rent Sales Timeline Details of the Debt Profile Most recent valuation of properties Page 6
Investor Relations PRIVATE & CONFIDENTIAL
Investor Relations A bi-lateral relationship Why bother with investor relations Getting to know the market Selling a product Ensuring continuous access to market Opening up new investors Maintaining constructive relationship with important stakeholders Page 8
Investor Relations A bi-lateral relationship Institutional Investors are long term passive investors and are not looking to influence the way you run your business. This is the case whether they are private placement or public bond investors The nature of the facility to some extent will influence the type of contact they will expect: A public bond investor can buy and sell the bond so he/she will be keen to see a transparent flow of information about the issuer coming into the public domain A private placement investor does not intend to trade in and out of its notes and will look to establish a bilateral relationship with the borrower for a more regular dialogue proactive contact around change potential future funding Types of investor Public bond issues Traditional private placement Listed Private Placements Long term savings institutions: Pension Funds Insurance companies Asset managers UK and US insurance companies UK pension funds UK Insurance companies UK Pension buy-out companies. Page 9
Investor Relations An approach to investor relations Debut Issue Network meet investors ahead of any decision ask the bank to introduce you to one or two investors Roadshow Presentation One on one or group meetings with investors About the issuer Supported by video or Bloomberg presentation May talk specifically on proposed issue On-going investor relations Information flow (subject to compliance issues) Investor section on website Results presentation Offer visits for all investors for public issues; private meetings for private placement investors Non deal roadshows continuing contact Page 10
Appendix
Speculative Grade Investment Grade Credit Rating The Credit Rating Scale Housing Associations are viewed as have Very low credit risk, and consequently are rated between Aa2/AA and A1/A+ Moody's Fitch S&P Aaa AAA AAA Aa1 AA+ AA+ Aa2 AA AA Aa3 AA- AA- A1 A+ A+ A2 A A A3 A- A- Baa1 BBB+ BBB+ Baa2 BBB BBB Baa3 BBB- BBB- Ba1 BB+ BB+ Ba2 BB BB Ba3 BB- BB- B1 B+ B+ B2 B B B3 B- B- Caa1 CCC+ CCC+ Caa2 CCC CCC Caa3 CCC- CCC- Rating Grade Description (Moody's) Minimal credit risk Very low credit risk Low credit risk Moderate credit risk Substantial credit risk High credit risk Very high credit risk Ca CC CC In or near default, C C with possibility of recovery C DDD SD DD D D In default, with little chance of recovery Housing Association Agency Rating Agency Rating Affinity Sutton Moody's Aa2 Amicus Horizon Moody's Aa3 B3 Living Moody's A1 Circle Moody's 3.7bn Aa3 East Thames Moody's Aa3 22% Family Mosaic Moody's Aa2 Genesis Fitch 13.4bn AA- Moody's A1 Gentoo Moody's 78% Aa3 Great Places Moody's Aa3 Fitch AA- Hastoe Moody's Aa3 Home Group S&P A+ Hyde Moody's Aa2 London & Quadrant Moody's Aa2 S&P AA- Longhurst Moody's Aa3 Midland Heart Moody's Aa2 Moat Moody's Aa2 Newlon Moody's Aa3 Notting Hill Moody's Aa3 Peabody Moody's Aa2 Places for People Moody's Aa3 S&P A+ Radian Moody's Aa2 Raglan Moody's Aa2 Saffron Moody's Aa3 Sanctuary Moody's Aa2 S&P AA- Saxon Weald Moody's Aa3 Sovereign Moody's Aa2 S&P AA- Together Housing Moody's Aa3 WM Housing Moody's Aa3 Hanover Moody s Aa2 Page 12
Important Notice Neither the whole nor any part of the information in this pitch/presentation may be disclosed to, or used or relied upon by, any other person or used for any other purpose and, in particular, should not be distributed outside the United Kingdom, without the prior written consent of Canaccord Genuity. The material contained herein may include unpublished price sensitive information, the misuse of which may result in criminal and/or civil proceedings against you. None of the information on which this pitch/presentation is based has been independently verified by Canaccord Genuity or any of its connected persons. Accordingly, neither Canaccord Genuity nor any of its connected persons accepts any liability or responsibility for the accuracy or completeness of, nor makes any representation or warranty, express or implied, with respect to, the information on which this pitch/presentation is based or that this information remains unchanged after the issue of this pitch/presentation. No duty of care or otherwise is owed by Canaccord Genuity or any of its connected persons to any other person in relation to this pitch/presentation. The valuation in this pitch/presentation has been prepared on the bases and assumptions described herein. This pitch/presentation is not intended to provide the basis of any investment decision and should not be considered as a recommendation by Canaccord Genuity or any of its connected persons to any recipient of the pitch/presentation. No person has been authorised to give any information not contained in this pitch/presentation. Nothing in this pitch/presentation is, or should be relied on as, a promise or representation as to the future. This pitch/presentation may only be communicated in the United Kingdom to: investment professionals, such persons having professional experience in matters relating to investments of this kind and who fall within Article 19 of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 (the FPO ); High net worth companies or high net worth unincorporated associations falling within Article 49 of the FPO; Persons who are already shareholders of the Company within article 43 of the FPO; and Any other person to whom this promotion may lawfully be directed. This document will only be available to the categories of persons in the United Kingdom described above and any other person should seek their own independent legal, investment and tax advice as they see fit. In this notice, Canaccord Genuity means Canaccord Genuity Limited and its connected persons means, the holding company of Canaccord Genuity Limited, the shareholders, subsidiaries and subsidiary undertakings of that holding company and their respective directors, officers, employees and agents of each of them. Distributed in the UK by Canaccord Genuity Ltd. Canaccord Genuity is authorised and regulated by the Financial Services Authority ('FSA') (with firm reference number 182011) and is a member of the London Stock Exchange. The FSA's principal place of business if at 25 North Colonnade, London, E14 5HS.
THFC
Funding Background THFC HA Sector successfully sourced significant amounts of cost effective long term funding from banks Changes in funding and regulatory landscape for banks mean they are reluctant to continue to provide long term funding Shorter/medium term funding available encouraged by Funding for Lending scheme Capital Markets have provided alternative source of long term funding Choices to be made in the context of longer term strategic objectives as part of a business plan balancing certainty, cost and flexibility
Capital Markets v Bank comparison THFC Banking Market Capital Market Flexibility Covenants Relationship Pricing and term Deal size Availability period Fixed or Floating Rate Revolving facilities Security specific and corporate/financial Levers for repricing? Lender familiarity Back book issues Margin over LIBOR c.185-250bps Medium term 5-10yrs Refinance risk? Minimum deal size depending on route chosen Drawdown in full on day one (some flexibilities possible) Fixed Rate Typically non-invasive, security specific only Familiarity with sector Less active ongoing relationship Equivalent to LIBOR + c.105-155bps Long term 20yrs+ Who? Few active lenders but increasing recently. c. 20-25 investors incl Prudential M&G, L&G, Aviva, Standard Life, Aegon, Royal London, CIS
THFC Non-bank Funding Options Bond Debt Products Public bonds Private Placements MTN programme Retail Bonds Sale and Leaseback arrangements REITS Equity
THFC Bond markets who are the investors and what do they want Typically UK Life and annuity funds some pension funds Different funds have different objectives Return versus risk Predictable cashflow inflation linked? Low maintenance Non-complex Liquidity Index eligible
THFC Investor choices the sterling bond market Total size approx. 1.5 trillion Of which 1 trillion UK Gilts 0.5 trillion corporates, supranationals, financials UK insurance & pension funds are predominant holders Overseas holdings roughly 1/3 of total market
UK Investor Choice: iboxx Index GBP non-gilts THFC Utilities: 15% RPs: 1%
HA Sector Public Bond Issuance THFC 4,000,000,000 3,500,000,000 3,000,000,000 Own name/other THFC 2,500,000,000 2,000,000,000 1,500,000,000 1,000,000,000 500,000,000-2004 2005 2006 2007 2008 2009 2010 2011 2012
HA Public Bond Issues since Jan 11 THFC Nominal amount Rating Date Issued Term Spread Cost ( ) (Years) over Gilts of funds THFC Funding No 2 76,600,000 A+/- Jan-11 28 0.99% 5.40% Peabody Capital 200,000,000 -/Aa2 Mar-11 31 1.00% 5.32% THFC Funding No 2 31,000,000 A+/- Mar-11 28 1.05% 5.39% PfP Homes UNSECURED 175,000,000 -/Aa3 May-11 20 1.70% 5.96% Notting Hill Housing Trust 120,000,000 -/Aa3 Jul-11 31 1.20% 5.29% Moat Homes Finance 150,000,000 -/Aa2 Sep-11 30 1.47% 5.10% THFC Funding No 3 100,000,000 A+/- Oct-11 32 1.80% 5.17% THFC Funding No 3 131,000,000 A+/- Jan-12 31 2.00% 4.94% Circle Anglia 250,000,000 -/Aa3 Feb-12 32 1.98% 5.22% Radian 75,000,000 -/Aa2 Feb-12 30 2.75% 6.03% Amicus Horizon 150,000,000 -/Aa3 Mar-12 31 2.15% 5.36% Hastoe 100,000,000 -/Aa3 Mar-12 30 2.15% 5.63% London & Quadrant 250,000,000 AA-/Aa2 Mar-12 21 1.57% 4.70% THFC Funding No 3 130,500,000 A+/- Apr-12 31 2.05% 5.37% Sanctuary 300,000,000 AA-/Aa2 Apr-12 35 1.72% 5.10% Saxon Weald 225,000,000 -/Aa3 May-12 25 avg life 2.48% 5.49% Sovereign Housing Capital 250,000,000 AA-/Aa2 May-12 31 1.70% 4.77% East Thames 250,000,000 -Aa3 Jun-12 30 2.50% 5.47% Longhurst 250,000,000 -/Aa3 Jul-12 26 2.42% 5.35% Midland Heart 150,000,000 -/Aa2 Sep-12 30 2.00% 5.10% Raglan 100,000,000 -/Aa2 Sep-12 25 avg life 2.00% 5.03% THFC Funding No 3 127,100,000 A+/- Sep-12 31 1.88% 4.99% Affinity Sutton 250,000,000 -/Aa2 Sep-12 30 1.25% 4.31% Great Places 200,000,000 -/Aa3/AA- Oct-12 30 1.70% 4.81% WM Housing Group 200,000,000 -/Aa3 Oct-12 30 1.55% 4.68% Together Housing Group 250,000,000 -/Aa3 Dec-12 30 1.45% 4.58% Notting Hill Housing Trust 250,000,000 -/Aa3 Dec-12 20 1.08% 3.78%
THFC What affects the pricing of a publicly issued bond? Market conditions firstly as the interest rate is based on the yield on UK Government bonds plus a margin (spread) and then... Size Credit rating and investors own assessment of corporate strength management and governance risk Security covenants and structure Term (maturity)
THFC 30 yr Gilt yield 3.400000 3.300000 3.200000 3.100000 3.000000 2.900000 2.800000 2.700000 2.600000 01-Aug-2012 01-Sep-2012 01-Oct-2012 01-Nov-2012 01-Dec-2012 01-Jan-2013
THFC Investors key concerns Increasing supply of HA bonds Differentiation between credits? Changing regulatory landscape Impact on cashflow of Lower grant rates and the affordable rent programme Benefit reform Direct payment of benefit Benefit reduction Caps Under occupancy
THFC Accessing the market How much do I need or want to borrow? What is my key driver? Cost of funds Maturity Covenants/security Timing Do I want to get a rating? What sort of relationship do I want with investors?
Public bonds vs UK private placements Public Bond THFC UK Private Placement Size 150m+ 30-100m Typical number of Investors Investor Types 5-20+ 1-3 Insurance Companies / Pension Funds / Asset Managers Maturity Typically 30yr+ Flexible Pricing Covenants/security Market driven depends on number of investors Standard developing for Aa2/Aa3 credits Based on public market plus premium investor led By negotiation investor led Rating Normally required Preferred Tradeable by investors Yes No Listed Yes No
THFC Non UK Private Placements Investors based in US, Japan or Europe Some can take GBP assets but others will require currency assets and derivatives will be needed to produce sterling borrowing Collateral considerations? Ratings not always required and in the US NAIC assessment more common than traditional ratings Term max 15 years
THFC MTN Programme A mechanism to issue bonds with different features under one set of documentation Term, currency, interest type etc Suitable for frequent issuers Same investors as stand alone bond transactions Lower cost to market and quicker to market for individual transactions but higher initial costs and some ongoing costs
THFC Secured or unsecured Secured bonds by far the prevalent model investor familiarity No uplift in rating for security Unsecured bonds would typically have covenant regarding unencumbered assets Premium pricing More focus on untested insolvency process More acceptable in private placements by negotiation, investor led
Own name or aggregation THFC Aggregation allows access to the bond markets for borrowers with smaller requirements Set up costs and ongoing costs can be shared In a new aggregating vehicle the structure and rating methodology would need to be agreed Rating requirement for participants? Security requirements common or individual? Credit or liquidity enhancement required for vehicle? No cross collateralisation No cross default between participants Prepayment by any participant to be allowed
THFC Aggregated approach THFC model Entity rating for THFC S&P A+ No external scrutiny of individual credits THFC internal credit appraisal Sector familiarity and support Standard lending criteria and documentation Investor familiarity Repeat borrowing through taps and size flexibility via retained bonds Speed to market
THFC Retail Bonds Niche but developing market offering diversification Secured versus unsecured strong credit reputational risk? Rating not essential Optimal size 50-100mill but potentially larger Distribution via professional channels regulated retail intermediaries Some additional disclosure required Pricing coupon driven not spread Interest proven appetite for fixed or RPI linked but variable rate also possible
THFC Summary Funding model has changed There are choices to be made and new risks, such as refinancing risk, to be considered The sector is attractive to a significant number of investors across different markets so availability should not be an issue In assessing different opportunities there will be a balance to be struck between pricing and structure/covenants and who holds the power!