USPP conference take away for social housing
Centrus attended US Private Placement Conference in Florida last week – a major industry event which takes place every year and brings together major North American institutional investors to discuss themes and trends in the market, hear peers’ views and understand transaction pipeline for the year ahead. We’ve seen a number of large UK investors who are looking to invest in US$ also attending the event in the last couple of years. As with the UK, the private placement market in the US is dominated by insurers, pension funds and asset managers all looking to match their long dated liabilities and invest in stable assets with predictable cashflows.
Compared to last year, many issuers from the UK infrastructure sectors (water, rail, ports, gas networks) were present at the conference. A larger number of issuers from these sectors went to the USPP market last year to take advantage of US Investor appetite in infra like sectors as well as positive £$ cross currency basis swaps, coupled with volatility in home market. UK water companies and ports were especially active issuers in USPP markets last year, along with an increasing number of UK and Australian REITs accessing the market.
Along with our activity in the housing sector, Centrus advises a range of leading companies in infrastructure, energy, utilities and transportation. Our attendance of the USPP conference and constant engagement with international banks and investors allows us to promote the UK housing sector which is often below the radar of those investors without existing exposure to it.
Centrus has met over 20 selected larger North American investors and engaged with half a dozen other large/medium sized investors which are new to social housing but who are looking to enter the sector and gain an exposure to RP credit. We expect this number to increase to just under 10 in the next 3-6 months and even further once uncertainty surrounding Brexit subsides. Brexit was firmly on the agenda during discussions with US investors in relation to UK issuers. However, compared to water companies for instance, most investors are relatively comfortable with political risk and view social housing as an “essential service” sector with good demand and limited supply characteristics as well as rent regime visibility. On the other hand of the spectrum, some investors who worry about Brexit overall see the social housing as sector having real estate like characteristics and deteriorating credit metrics (sector downgrades or negative outlook) and won’t be looking to invest until political and credit outlook stabilizes.
Overall, we saw very healthy appetite for the sector from the US investor base (both on secured and unsecured basis). Typical tenors are 10-30 years with 15-25 year bullets being a sweet spot in USPP market. Several larger US investors don’t require credit rating, although they find it beneficial from regulatory perspective. Covenant packages for secured transactions typically includes asset cover and interest cover covenants (however the latter is not necessarily required) and pricing is close to being in line with UK public benchmark issuance for similar maturities with a small additional new issue premium. Relatively competitive pricing by US investors is driven by a beneficial £$ cross currency swap as well as a diversification driver to new sectors which they have relatively small exposure to. Given the depth and size of USPP market (circa £70bn+ per year compared to half of that in the UK) we expect US investors to play an increasingly significant role in the funding mix of housing associations and provide an effective alternative to the existing UK investor base going forward.