February 2011 EMTN Programmes and Private Placements Chris Jones, Places for People Chris Lipscomb, Morgan Stanley Peter Matza, The Association of Corporate Treasurers
Section 1 EMTN Programmes: Setting Up and Issuing
EMTN programmes: setting up and issuing What is an EMTN Programme? What does EMTN stand for? EMTN stands for European Medium Term Note Most bonds issued in the UK and Europe are European Medium Term Notes EMTNs are typically suitable for sale to European, Middle Eastern and Asian investors What is a programme? A programme is a documentation framework which enables the issuer to issue European Medium Term Notes in a timely manner How does it work? Assuming an up-to-date programme, an issuer may drawdown on the programme (i.e. issue bonds) at short notice (e.g. 48 hours) using the Final Terms outlined in the programme Investors buy the bonds as they would a standalone issue, and the bonds may be public or private Once established, the programme is updated on an annual basis What maturities? Almost any maturity What currencies? Almost any currency What are the costs? The costs of the programme are similar to the costs for a one-off issue The costs of a drawdown are very limited once the programme is in place
EMTN programmes: setting up and issuing Establishing the Programme Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Counsel and Issuer to prepare business disclosure Appoint parties (arrangers, counsel, dealers, paying agent) Auditors to begin comfort letter Counsel to begin drafting documents First drafts of Programme Legal documents circulated First draft of Auditors Comfort Letter distributed First draft of base prospectus circulated Due diligence questions and mandate letter distributed Conditions Precedent docs distributed Due diligence questions agreed, mandate letter executed Issuer s board to approve base prospectus Due diligence call Base prospectus signed off Opinions and comfort letter delivered Documents signed
EMTN programmes: setting up and issuing Drawing Down Process Day 1 Day 2 Day 3 Day 4 (Pricing) Day 10 (Signing) Day 11 (Closing) Roadshow (if required), and announce intention to issue to market Prepare any prospectus supplements (e.g. Recent Developments ) Pre-pricing due diligence call AM Announce formal price talk to market, and open book PM Books closed, transaction priced Pre-signing due diligence call CP documents in agreed form (legal opinions, comfort letter, closing certificates) Sign Final Terms and Subscription Agreement Pre-closing due diligence call Delivery of CP documents Funds settle
EMTN programmes: setting up and issuing Advantages of an EMTN Programme Time and Cost Savings Pre-established documentation reduces management time and legal fees Diversification of Funding Sources Broad investor base access in Europe, the Middle East and Asia Financing Flexibility Maximum issuance flexibility with respect to issue size, structure, maturity, currency and market Instruments can be vanilla bonds, hybrid instruments, private placements, etc. Direct access to multi-currency financing Enhanced Opportunities Ability to issue both strategic public bonds and opportunistic private placements Opportunities to lower average cost of funding through structured transactions Immediate access to time sensitive market windows and arbitrage driven opportunities Capital Markets Presence Establishment of a global presence in the capital markets through a global funding profile Regular dialogue with MTN traders gives valuable global reconnaissance
Section 2 Secured vs. Unsecured
Secured vs. Unsecured Tesco: a Premium for Security? Trading Performance of Tesco property Finance Transactions Spread measured against Government benchmark Gilt Basis Points 350 G+330 bps 300 250 160 bps G+220 bps 200 70 bps G+165 bps 150 45 bps 20 bps 100 Jun-09 Aug-09 Oct-09 Dec-09 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 TESCO 6.05% 2039 TESCO 5.74% 2040 TESCO 7.62% 2039 TESCO 5.00% 2023 Secured Bonds Unsecured Source Morgan Stanley, Markit1
Secured vs. Unsecured How Important Is Security To Investors? Trading Performance of Housing Association bonds vs UK real estate spreads Spread to benchmark (bps) 700 600 500 400 300 200 100 Index 650 630 610 590 570 550 530 510 0 490 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 PfP 20s PfP 43s UK Real Estate (1) UK Housebuilding Starts Source Bloomberg, Morgan Stanley Notes 1. UIRE Index from Merrill Lynch Credit Indices
Secured vs. Unsecured Security: a Rating Agency View Rating agencies typically classify housing associations as government related entities i.e. entities which would likely receive extraordinary government support if required to meet financial obligations Consequently, ratings for housing associations tend to be in the A to AA category, irrespective of security S&P notes that while a secured bond, with high prospects for recovery in the event of default, can be rated higher than an issuer credit rating, this is not the case if the issuer credit rating is AA- or above
Section 3 An Issuer s Perspective
Business Description Business Description One of the largest property management, development and regeneration companies in UK Exists to improve current neighbourhoods and build new ones Group has a portfolio of companies that own and operate assets to provide: Social housing Market rent Development for sale Land and infrastructure investment Financial services Charities All with their own funding demands!
Business Description Places for People Portfolio
Business Description Places for People Statistics Over 62,278 homes owned and managed 2010 turnover 312m Fixed assets 3.1bn Debt 1.61bn Grant 1.3bn
Business Description Treasury Management Very strong banking and UK, US & Japanese investor relations Minimum 12 month cashflow backed by undrawn, committed bank credit facilities 232m available funding 75% of debt fixed or hedged Interest Cover 1.3x (after dep n) Gearing 51% Credit ratings: Places for People rated A+ with Standard & Poors Places for People Homes rated Aa3 with Moody s Stable outlook
Business Description Capital Structure Funding mix: Gross debt of 1.61bn as at 31 March 2010 Sterling bonds outstanding 585m US private placements $200m ( 131m) JPY EMTN placement JPY 10bn ( 76m) Bank and other debt 818m (mainly arranged on an RCF and bilateral basis) Average maturity target of debt is 15 years
Approach to Funding Approach to Funding Complex business structure requires support from a robust but flexible funding model Which must evolve as the business grows and the operating environment changes: Falling grant levels Challenging credit markets Slow recovery of housing market Housing benefit levels??? Investors are key to our future stability and growth
Approach to Funding Approach to Funding (cont d) Different types of investment have their own funding needs and structure Development programme balance towards more for sale and flexible tenure together with investment in land and infrastructure Cashflow & matching assets with liabilities Group treasury management with inter-company loans So, from where do we source our funding?
Approach to Funding Our Funding Model Short term debt the bank sector Medium term debt private placements & capital mkts Long term debt the capital markets Our target is to move over time to 50-60% unsecured funding Liquidity and funding flexibility and then, pricing Diverse investor base a key priority!
Approach to Funding Our Funding Model (cont d) Bank RCFs EMTNs & Private Placements Bonds Up to 5 Years Up to 15 Years 20+ years UNSECURED SECURED Refinanced by:
Bank Debt Approach to Funding 364 day to 5 year revolving credit facilities A mix of secured and unsecured (but restructure to fully unsecured over time) 1st call on surplus cash to repay debt Used to fund short to medium term cashflow
Capital Markets Capital Markets Private Placements Medium Term Note Programme Bond issues
Capital Markets Private Placements Smaller volumes Single investor or a small club US market very large and well developed Well suited to medium term funding Competitive pricing Credit ratings not essential but helpful Cross currency swap can add to all in pricing Unsecured funding a possibility Again, investor relations
Capital Markets Medium Term Note Programme 5, 7 and 10 year tenors 650m unsecured programme rated Aa3 Flexible funding with floating and fixed rates Attractive covenant structure Sterling, Euro and Dollar denominated Ready to go when the time is right!
Capital Markets EMTN Covenant Net available properties value (NAPV) not less than 1.1 times total unsecured debt NAPV calculated as: Total properties value (inc FAI, Stock & WIP) 2.9m Less: Total secured debt 1.4m Public sector grant 0.9m NAPV Unsecured debt 0.6m 0.3m i.e. 2x cover
Capital Markets Bond Issues 585 million of capital market debt 4 own name issues 25 to 30 year tenors Structured around net cashflow of pooled assets and ability to service the bond No corporate covenants Private placements on 5, 7 and 10 year tenors
Capital Markets Bond Issues Approach Clear strategy Key people and resources Timing a key factor Credit rating considerations Investor relations road shows and credit analysis (incl. regular updates) Size and structure Costs Future considerations servicing and management
Capital Markets Bond Issues Advantages Large volumes typical issue size 100m + Smaller sizes facilitated through conduits, e.g., THFC Long term fixed rate money banks tending to lend short to medium term with options for longer dated money Competitive pricing currently 1.00% over gilts! Generous security and covenants Low on-going management
Capital Markets Bond Issues Disadvantages It is there for the duration of term Expensive to refinance Credit ratings are a pre-requisite Structure can be complex and security intensive and substitution may be more tricky
Capital Markets Investor Relations Investor relations is a key treasury priority Proactive dialogue with investors (& CR agencies) Annual Investor Seminar Investor section on website includes video of AIS for overseas investors, etc.
Secured vs. Unsecured Secured vs. Unsecured Negligible effect on credit ratings emphasis on underlying cashflows and government support PfP unsecured EMTN programme rated Aa3 same rating as the issuer Investors protected by the strength of the balance sheet and conservative gearing and therefore, no real value in carving out assets Non default sector insolvency work out would be to transfer assets (and debt) to another RP Spreads to secured debt are relatively small (25 bps) offset by costs of implementing security arrangements and ongoing portfolio management and substitution. Therefore, who benefits from the massive industry created by security portfolio placement?
Secured vs. Unsecured Summary Keep your funding model flexible Build and maintain strong investor relations Develop and maintain a diverse debt portfolio Preparation is key to success
Section 4 Flexible Funding Strategies
Flexible funding strategies Why Diversify From GBP? 30 year Gilts yields and PWLB spreads % 5.5 5.0 4.5 4.0 3.5 3.0 2006 2007 2008 2009 2010 2011 30y Gilt PWLB spread Source PWLB, Bloomberg
Flexible funding strategies Local Authorities Looking to Bond Markets Sources of Local Authority Long-Term Borrowing for Capex (2004/5 2008/9) Bn 10,000 8,000 6,000 4,000 2,000 0 (2,000) Negotiable Bonds Other Listed Securities PWLB Banks Building Societies Other Financial Intermediaries Rest of the World Source New Local Government Network (NLGN)
Flexible funding strategies Cross Currency Swap: An Example Step 1: Housing Association issues a JPY bond Fixed Coupon plus Final Principal Housing Association Asian Investor Initial Principal
Flexible funding strategies Cross Currency Swap: An Example Step 2: JPY Principal exchanged for GBP at today s FX rate Initial Principal Fixed Coupon plus Final Principal Swap Counterparty Housing Association Asian Investor Initial Principal Initial Principal
Flexible funding strategies Cross Currency Swap: An Example Step 3: JPY coupons and principal repayment exchanged for GBP coupons and principal repayment at today s FX rate Initial Principal Fixed Coupon plus Final Principal Fixed Coupon plus Final Principal Swap Counterparty / Cross Currency Swap Fixed Coupon plus Final Principal Housing Association Asian Investor Initial Principal Initial Principal
Flexible funding strategies Cross Currency Swap: An Example Net Cashflows: No FX Risk HA receives GBP at inception HA pays GBP interest and original principal back at maturity Initial Principal Fixed Coupon plus Final Principal Swap Counterparty Housing Association Asian Investor
Flexible funding strategies Managing Negative Carry from Bond Issues Housing Association Issues Bond Housing Association incurs cost of carry on invested cash Cash Cash Deposit LIBOR Housing Association Fixed Coupon Bond Investors
Flexible funding strategies Fixing Coupons Along the Forwards Fixed rate fixings in a step-up swap 6 5 4 3 2 1 0 2011 2012 3 month forward libor Source Morgan Stanley 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040
Flexible funding strategies Step Up Swap-to-Fixed Step 1: Swap new fixed rate bond to floating Cash Cash Deposit LIBOR Housing Association Fixed Coupon Bond Investors LIBOR Fixed Coupon Bank
Flexible funding strategies Step Up Swap-to-Fixed Step 2: Swap existing floating debt to step-up fixed to preserve fixed/float mix Cash Cash Deposit LIBOR Housing Association Fixed Coupon Bond Investors LIBOR Fixed Coupon Swap counterparty Swap counterparty LIBOR Housing Association LIBOR Bank lender Fixed rate, stepping up with the forwards
February 2011 EMTN Programmes and Private Placements Chris Jones, Places for People Chris Lipscomb, Morgan Stanley Peter Matza, The Association of Corporate Treasurers