Given the consolidation in the housing association sector in recent years, we often point out that the largest HAs are bigger than their FTSE 100 property equivalents on most measures. The next tier of HAs below that are also now very large corporate entities. One consequence of this is that we are seeing a steady move towards a re-setting of the relationship between these borrowers and their banking groups in the context of a clear strategy.
As legacy bank liabilities steadily amortise, are restructured through mergers, or are replaced with more sustainable market level funding, banking portfolios are looking more like those of other property-owning businesses. HAs have more willingness to restructure their banking relationships and address legacy lenders’ concerns when the result is tailored to support the needs of the HA as borrower. As legacy issues reduce and new lenders come into play, banks are better placed to provide responsive and flexible support through balance sheet, underwriting and ancillary services and take their rightful role as “enablers”.
One good example of this progress and shift in relationships is the increasing provision of “bridge to bond” facilities from HA relationship banks.
Bridging Loans in an HA Context
For HAs, bridging facilities typically provide committed liquidity until they can issue into the public bond markets. As well as providing greater flexibility, bridging facilities also provide an opportunity for HAs to expand the relationship with their key lenders.
In this context, bridging loans are often very short term (2-3 years) with the potential for some or all of that period being unsecured. Mandatory repayment clauses force prepayment and cancellation upon DCM issuance and fee structures incentivise refinancing – the facilities are really meant to be bridges after all rather than “emergency liquidity”. In other sectors the term can be shorter still but given the vagaries of property investment timetables we see it as worthwhile HAs pushing for the longer end of this range.
Key benefits of Bridging Loans
- Efficient Liquidity Provision – a period of being unsecured means that committed liquidity can be provided at short notice and low cost, with underwriting often sitting separately from core relationship lending teams.
- Mitigate Execution Risk – the provision of committed liquidity affords some flexibility to the issuer and allows them to enter the market on their own terms rather than being a forced issuer.
- Leveraging Existing Bank Relationships – by involving a borrower’s core relationship banks, concessions can be gained in legacy facilities as part of the overall relationship package.
Centrus’ Recent Experience
We have recently seen a number of bridges taken by HAs for a variety of reasons and with some interesting nuances in the structures.
One client focussed on the bridge mainly as a vehicle for mitigating execution risk: the purpose of the bond was to refinance existing facilities and the security to be released was required as collateral for the new bond. By arranging the bridge it allowed the issuer to prepay an existing lender, release the security and subsequently allocate as collateral to the bond in a timely manner without risking execution.
A simultaneous bond issuance, prepayment and security release is of course possible, but removing complexity from the primary issuance (alongside the flexibility to issue to the issuer’s own timeline) was seen as a prudent approach that reduced risk in the context of an already complex set of transactions.
Interestingly, this bridge was also dual-tranched with the second tranche coming online once the first bond had been issued: this provided further flexibility for the issuer whilst retaining an efficient fee structure. The RFP process also involved a request for concessions on existing facilities, reinforcing the idea that mature banking relationships should be mutually beneficial – the stick and the carrot both have their places!
Another recent example which undoubtedly highlighted banks’ ability to be responsive and supportive occurred towards the end of 2018: a three week process – from RFP to execution – focussed minds and led to an excellent result for the borrower.
With three banks on board to split the substantial bridge requirement the decision had to be made between a syndicated facility or bilateral agreements. Syndicated bank facilities are more of a norm with large corporates and utilities and, in our view, a move to more mature banking relationships in the HA sector might in part involve a renewed appetite for large syndicated liquidity facilities. Some of the banks had a preference for a syndicated approach where they felt they would have more visibility of the overall transaction, given the low pricing of the bridge funding.
A syndicated facility simplifies documentation, but the entire process could be held hostage by the slowest moving bank. A series of bilateral facilities, on the other hand, would require three separate agreements to be negotiated and documented within the three-week timeframe but would allow execution of just part of the requirement if, for example, only two of the three agreements were finalised.
In this case the decision was made to pursue three bilateral agreements and it paid off: two agreements were swiftly executed with the third also finalised within a very narrow timeframe. Good relationships and open communication helped considerably.
Bridging the divide
Our view is that building better managed relationships with top tier banks via additional ancillary business (DCM, acquisition finance, liquidity facilities, hedging etc.) is a win-win: the banks like the deeper relationships and the erosion of legacy portfolio value naturally makes them more enthusiastic. The quid pro quo is that for HAs with ambitious development programmes, legacy debt has sometimes been a block to progress.
This article has focussed on bridging loans, which give flexibility for HAs looking to enter the public bond market (or indeed other capital markets). On one level they are simply another example of how banks’ direct balance sheet support is now focussed on the short term, but if used effectively they enable borrowers to align funding with the needs of the business. Bridges need to be tailored rather than “taken off the shelf”, but they can help to manage risks around funding investment programmes and thus be a good example of using banking relationships to support the wider business.
For more information, please contact Lawrence Gill, Director – Centrus