Alternative forms
of finance
Sponsored by
Alternative forms
of finance
Sponsored by
Adrian Carter
Partner
Trowers & Hamlins
Agenda
■ context/market
■ bond issues
■ private placements
■ sale and leaseback
■ Islamic finance
■ Quasi-equity
■ conclusions
Context/market
■ the Banks
■ £3bn lent/committed in 2010
■ but
■
■
■
■
■
bank’s own finance
Term
Margin
Backbook re-pricing
appetite
■ an obvious need to look at alternatives
Bond issues
Why suitable and why now
■ historically attractive
■ less so for last 10 years
■ pricing has converged (5-6%)
■ availability of funding
■ long term (30 years)
■ suitability for investors
■ Clearly now a real alternative
Bond Issues
Recent Issues
Circle Anglia
£399m
11/10
7.25%
TFC
£371m
04/11
6.35%
L&Q
£300m
01/10
5.55%
Sanctuary
£320m
09/10
6.69%
Hyde
£200m
07/10
5.12%
Notting Hill
£180m
07/10
5.25%
Peabody
£200m
03/11
5.25%
Bond Issues
What is it?
■ series of IOUs
■ listed on a recognised stock exchange
■ marketed to institutional investors through financial
intermediaries (but, PfP retail)
■ usually underwritten
■ long term, fixed rate
Bond issues
Documents and parties
■ offering circular
■ bond trust deed
■ subscription agreement
■ lead manager
■ rating agent
■ security trust deed?
■ financial and other covenants
Bond Structures
Structures
■ own name issues
■ treasury vehicle as issuer
■ on-lends to RP(s)
■ which to choose?
■ security trust deed
■ marginal accounting advantage
■ but, bank covenant compliance and guarantees
Bond issues
Structures
■ groups and clubs
■ issuer as an independent vehicle
■ THFC
■ HALOS/Haven/FFH etc
■ GB Social Housing and others
■ by far the most used model
■ smaller loans/access for other than the very largest RPs
Bond issues
Pros and cons
■ size of issue (£150m+)
■ timing issues
■ real available source
■ time consuming (security)
■ short drawdown/no facility
■ cost of carry
■ covenant inflexibility
■ but becoming increasingly covenant light
■ a real alternative, available now
Private Placements
What is a private placement?
■ a direct sale by the issuer of debt securities
■ another series of IOU’s
■ to sophisticated investors
■ long term investments
■ not for resale
Private Placements
Investor Market
■ The market
■ US$16bn in 1990
■ US$839bn in 2005
■ US$45.7bn (annual) in 2005
■ Originally domestic
■ now US market is less than 50%
■ UK accounts for c 10%
Private Placements
Investor Market
■ Issues by transaction size
■ majority between US$100-200m
■ UK issues not less than £50m
■ Currencies can be US$/£/€/Yen
■ Issues by maturity
■ 7-15 years c 75%
■ 15-30 years 10%
■ exceptionally – 50 years
Private Placements
Process and documents
■ transaction preparation – information memorandum
■ marketing – investor presentation
■ circling – book building and pricing
■ pricing and closing
■ note purchase agreement
■ US legal advice
■ covenants drawn from domestic loans
■ first fixed charge security
Private Placements
Advantages
■ long term fixed rate funding
■ no rating required
■ sophisticated investors
■ speed of execution
■ standardised documentation
■ confidential market
Private Placements
Advantages
■ flexibility of terms and structures
■ reduced documentation requirements
■ transaction costs
■ issue size
■ timing flexibility
Private Placements
Disadvantages
■ investor inexperience
■ no real investor/issuer relationship
■ amendment process for documentation can be
lengthy
Sale and leaseback
■ disposal of freehold
■ In return for a freehold interest
■ premium receipt
■ rental payment
■ repurchase payment
■ characteristics of a loan
Sale and leaseback
■ tax and accounting treatment
■ security effect
■ covenant light
■ real deals being negotiated as we speak
■ available, if not yet proven
Islamic Finance
What is Islamic Finance?
■ a system of financing which complies with Islamic law
■ acceptable means of financing for observant Muslims
■ based on Islamic law (Shari’ah)
■ derived from Qu’ran and other sources
■ not a codified system of law – different schools of interpretation
Islamic Finance
Principles of Islamic Finance
■ need to achieve justice and equity – social enterprise is favoured
■ no profit without risk – but profit is encouraged, assets should be
put to profitable use
■ will not finance unlawful (haram) activities eg gambling, alcohol,
pork products
■ the Qu’ran prohibits payment of “riba” or interest
■ obvious synergy – needs to be socially responsible and ethical for
operations
Islamic Finance
Islamic finance worldwide
■ there are approximately 300 Islamic financial
institutions
■ US $400-500 billion of assets under management
■ Islamic banks operate in 40 countries
Islamic Finance
Islamic finance worldwide
■ UK – FSA has authorised 6 Islamic banks
■ Islamic Bank of Britain is the only one with a retail business
■ some non-Islamic banks offer Islamic products
Islamic Finance
Islamic investment in the social housing sector
■ direct investment in RSLs unlikely because of
requirement for high levels of debt finance
■ this would not prevent use of Islamic finance to fund
individual projects or schemes
■ sale and leaseback model
Islamic Finance
Islamic investment in the social housing sector
■ problem: Islamic investors likely to be looking for shorter terms
■
■
■
■
5-7 years – RSLs historically have required 20-30 years
but remember where banks now are
margins have been historically low but now increasing
so time to reconsider?
interested parties, but no transactions yet
Quasi Equity Investment
■ characteristics of RSL and Investor
■ structural options
■ exit arrangements
■ things to think about
Quasi Equity Investment
Characteristics of RSL
■ no profit distributions to shareholders
■ access to HCA funding
■ TSA registration
Quasi Equity Investment
Characteristics of Investor
■ shares in risk and reward
■ won’t want management hassle
■ won’t want to jump more regulatory hurdles
Quasi Equity Investment
The virtual SPV
Investor
Funds
Return based on
performance of
asset
RSL Business
Ring
fenced
assets
Funding
HCA
Quasi Equity Investment
The virtual SPV
■ what is investor funding?
■ cost net of grant
■ security for investor (if any)
■ performance based payment so no guaranteed
repayment
■ incentives for RSL to manage well
Quasi Equity Investment
The lease model
Investor (freehold owner)
Rent based on
performance of asset
Lease
RSL
Tenancies
Rent
Tenants
Funding
HCA
Quasi Equity Investment
The lease model
■ sale and leaseback – but no fixed return
■ why a lease not a management agreement?
■ avoiding irrecoverable VAT
■ insulating Investor from landlord role
■ allow RSL to access HCA funding
Quasi Equity Investment
Exit arrangements
■ long term investment
■ at expiry:
■
■
■
■
hand back to Investor with VP
buy at then market value or fixed price
option or obligation?
HCA/TSA view important here
Quasi Equity Investment
Conclusion
■ structural solutions possible
■ need to attract investor interest
■ scale and return will be key
■ are RSLs interested in this type of model?
Conclusions
■ dearth of banking lending
■ bonds can replace to a degree
■ but there are limitations
■ PP market in its infancy, surety more to come
■ sale and leaseback imminent
■ the rest is, so far, all talk
Alternative forms
of finance
Sponsored by