What should HAs consider when looking to overseas investors?
In speaking of social housing borrowers looking at overseas investors, if considering institutional investor funding, international markets should be taken into consideration by larger borrowers with the relevant treasury resources to manage more complex processes, on-going monitoring, and appropriate risk management. Accessing new investors engenders increased competition and access to wider capital pools for borrowers.
Due to increased sector awareness abroad stemming from investor education on the sector we’ve seen an increasing number of transactions involving non-UK investors. Unsurprisingly, large pools of capital potentially interested in Social Housing are based in other developed financial markets such as US, Europe, Nordics, Japan, Hong Kong, and Korea. Each of these markets has its own specific characteristics and preferred formats in which institutions (largely insurance companies, pension funds and asset managers) prefer to invest.
Attractions of the US market
The largest international capital market is the US; this private market is well established and deep dating back to the 1990s. The US private placement market is also the largest alternative funding market for UK Housing Associations. Over the last couple of years HA borrowings from the USPP market amounted to over a couple of billion £this continues to grow. US Investors are attracted by regulation, stability, the strong ratings of Housing Associations, and to a lesser extent the secured nature of obligations. With the USPP markets scale, low exposure to the UK HA sector, and capacity it provides a good alternative to the domestic UK market where some native institutions have very high exposures; M&G alone have almost £5bn of housing association debt across public and private paper. Sanctuary was one of the first HAs to issue an USPP and has borrowed over $400m from US investors with the most recent unsecured issue in March last year.
Other UK housing associations accessing the USPP market in recent years include Vivid, Newlon, Network Homes, Octavia, Stonewater and Bromford. Large borrowers such as Peabody, Circle (now Clarion), Orbit, and Places for People have also previously accessed the US market.
The main attractions of the USPP market are a large investor base along with interest in the sector, competitive pricing, large ticket sizes, and options for bilateral or “club” deals. The UK market has primarily evolved around just bilateral deals. USPP documentation is similar to a UK Note Purchase Agreement (“NPA”) apart from US representations and cross currency swap break language which is required by most US investors. Issuers receive GBP funding and most investors execute the swap on their side but require a swap break cost indemnity in the event of optional prepayment by the borrower. Borrowers may choose to fund in USD and swap the currency themselves. However, in most cases, UK borrowers across different sectors will prefer the US investors to hold the swap. Covenants tend to include asset cover with interest cover and sometimes a gearing covenant. The exact suite will depend upon the credit quality and size of the borrower. US investors are willing to provide unsecured funding as well and more amenable to this format than their institutional counterparts in the UK. We have seen some borrowers accessing the market with secured and unsecured tranches and the premium for unsecured tends to range between 30-50bps depending upon market conditions and credit quality. The USPP market tends to prefer medium-dated maturities ranging from 15 to 25 years with a maximum term of 35 years.
From a relative value perspective, the competitiveness of US investors depends on spread levels for similarly rated domestic issuers in the US, general credit perception, appetite, and the cross-currency basis swap. The impact of cross currency basis has deteriorated since early 2018 due to movements in the GBP/USD exchange rate, however we still see UK issuers entering the US market as credit perception and general appetite still provides scope for investors to provide tight spreads.
Asia and Europe
Beyond the US market there has been interest in the UK housing sector from other region driven mainly by the highly rated nature of the sector (for Asia) and the Environment, Social and Governance (“ESG”) investment angle (for Europe and Nordics). These markets have a less established track record but we are seeing rising appetite from investors based in Korea, Japan, Hong Kong, Europe and Norway. Korean insurers provide GBP funding and, in most cases don’t require swap break cost language. Preferred documentation tends to be as listed MTN but loan/PP formats can also be used. Less value is assigned to security as Asian investors value a wider spread over security. We’ve seen pricing competitive or in line with UK markets at ticket sizes of c. £100-150m per name from Korean investors. Japanese investors are less active and require the issuer to do the swap. They can, however, be very competitive for unsecured funding provided the issuer does the swap (Notting Hill and Places for People have accessed the Japanese market in the past in smaller sizes of c.£50m per transaction). Asian investors provide shorter tenors; up to 20 years for Korea and 12-15 for Japan. Lastly, the Hong Kong market is similar to the Japanese in terms of demand and number of transactions.
We are seeing some investor demand from Europe (mainly Germany and Benelux) and Norway. Unlike the US, European investors typically don’t do cross currency swaps themselves and require issuers to swap. There have not been many transactions in Euros with Places for People accessing the Euro market to date, however we expect issuance in Euros to pick up as we see increased interest from investors in the sector driven by ESG targets.
With the UK housing association market becoming a more internationally recognised asset class and borrowers increasingly sophisticated in accessing these markets, we expect activity with international investors to grow, providing healthy competition for domestic institutions.
Originally published at the Social Housing Magazine on the 9th May 2019.
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