Analysis & Comment  > Bond of the Week

Share |
Back to 2012

Bond of the Week: 4 July 2012
Primary Health Properties PLC (PHP) 5.375% 7yr bond

Having hovered in the wings for a surprisingly long 7 days since their Stock Exchange presentation, PHP has finally been pushed onto the stage with their first bond. They are introduced by a new impresario in the retail bond sector - IDCM. Welcome to IDCM as a first time arranger and here are the terms of the bond:

Issuer:         Primary Health Properties PLC
ISIN:           XS07954458283
Rating:         Not rated
Status:        Senior unsecured
Coupon:       5.375% Semi- annual
Size:           To be determined by demand. Max. £75 million
Maturity:     7 years 23rd July 2019
Listing:        London (on the ORB)
Offer period: 3rd July to 16th July

Unusually for a lead manager of an ORB (retail) issuer IDCM are acting purely as corporate finance arrangers and will not be making a market in the PHP bond. Market makers are to be Winterflood, Peel Hunt and Shore Capital and I am sure they will provide the required liquidity in the aftermarket.

PHP, listed on the LSE with a market cap of some £230 million, is a REIT (Real Estate Investment Trust) specialising in letting out new builds on long term leases (typically 21years) to GP group practices, health centres and similar organisations. Around 90% of the rental income is underpinned, indirectly, by government funding. As a niche player in the property market with non-cyclical tenants on long term leases ultimately backed by the state, PHP see themselves as low risk and therefore deserving of a low coupon (on a relative basis) on their unrated first time bond. PHP also has a comfortable LTV of 58% (something many a bank would be envious of) and 95% of leases have a triennial rent review.

Supplying buildings (and doubtless many other things as well) to the health sector has been a very buoyant sector over the last decade. Following the 2001 Gordon Brown sponsored Wanless report “Securing our future health- taking a long term view”, there was an increased splurge of government spending on health from an already profligate chancellor. (NHS expenditure increased from £35bn in 1998 to £102bn in 2011). Post Wanless 1/3rd of GP surgeries have been substantially upgraded or replaced, 625 new one-stop primary care centres have been created and much money has been spent on upgrading local NHS infrastructure, a renewal process that continues to this day; all grist to the PHP mill.

As to name recognition, PHP is well known, considering its market size, by private investors and private client stockbrokers. It has produced a much favoured reliable and progressive dividend stream (onwards and upwards every year since 1997), albeit that the share price has been unexciting and meandering. As such the name is a natural fit into an ISA or SIPP portfolio. The dividend yield at 6% is better than that on the retail bond and indeed that may be where the true value lies, but a bond is a bond and an equity an equity so we should not get too hung up by the yield gap. It exists for many other quoted UK companies.

A sterling 5.375% coupon, a good credit story and no imminent prospect of a rate rise; is it “nuff said” and put in an order? That is what some of my more straight forward colleagues have told me; - don’t be so complicated; avoid all the flummery; it looks cheap to me.  I, however, think we should first look at it from the other side - from PHP’s point of view.

As you would expect from a property company, all the current debt on the balance sheet is secured debt, secured by a fixed and floating charge over the various buildings they own. The PHP 5.375% which will stand, alone, in its own class, is therefore de facto subordinated to all existing debt and all future mortgages. Accepting the professional management, quality asset book and advantages of size of PHP, think for a moment what it would cost in financing should you decide to purchase a commercial premise and take out a mortgage and then think what a bank might say should you ask to borrow unsecured money for the company undertaking such a venture. 

You can look at it another way. The assets PHP holds are financed by secured debt and equity (on which they are paying a 6% dividend yield). Post this issue they will have the same secured funding but can now replace equity at 6% with debt at 5.375%. For instance next time PHP embarks on a construction project the equity portion required by a bank can come from this bond rather than dipping into precious equity AND the cost is less. There must be a great temptation to gear up the balance sheet in this way but I believe the management have undertaken not to do so.

We can also speculate at what rate money could have been raised by PHP on the institutional market. Comparables are few: Segro is rated A- and Land Securities AA and both are far bigger companies, so their rather illiquid bonds give no real guidance. I cannot see how it would be anything other than very difficult to get an unrated unsecured bond away for a modestly sized REIT (or trading company) and should it be possible at all, institutions would almost certainly be demanding a considerably higher coupon than 5.375%. As a relatively recent example Intermediate Capital Group, a provider of mezzanine finance rated BBB3 and with a market cap four times that of PHP, failed to get an institutional offering away at 8%+ (despite having a lower coupon retail bond trading at a good premium).

It seems Harry Hyman managing director at PHP, has negotiated himself a fine old deal. But who can blame him. It appears the market approached him, desperate for fixed rate bonds from a non financial corporate with some yield (5%+), rather than the other way round. PHP fitted the bill. As to pricing my understanding is that some private wealth managers, being much more focused on relative value than private clients, were not happy with the coupon offered at the presentation – 5 ¼ to 5 ½%; hence the rather protracted period waiting in the wings while negotiations took place. Given the coupon has not moved and PHP has not budged I imagine wealth managers may have a limited interest in this bond so individual investors could well end up being the major buyers  - which should have some positive benefits (see below).

How will it perform in the aftermarket? Surprisingly given my comments above I think a premium is still likely over the short to medium term. Perversely a bond which might not attract the more bond savvy investor (ie funds) can perform well post issue as there will be fewer holders willing to feed out bonds as bids come in. And the coupon should be enough to assure a steady trickle of buyers in this yield hungry world. Holders will be mostly SIP and ISA investors who are in for the long term so will be unlikely to fill in any shorts.

Conclusion. I have little doubt the coupon and capital of this bond is safe and PHP have a good story to tell of expanding spending on health centres and government backed rent cheques. Who of a certain age, visiting the GP, cannot be impressed by the rather smart and updated premises - modern art on the wall, disabled parking and a presentable receptionist - compared with yesteryear’s rather dingy front room, festooned with dying spider plants, in a crumbling Victorian house. With an attractive coupon and good private investor name recognition this should be enough to get the issue away and pragmatically it could be a good investment. Maybe the simple straight forward approach is best. Given also the reasonable expectation of a premium in the coming weeks and my colleagues more sanguine approach, as explained above, we may make a modest purchase ourselves. However there is no doubt in my mind who the winner is with this issue. ‘arry has played a blinder.
Oliver Butt

Oliver Butt is a Partner in City and Continental LLP, a leading independent broker in fixed income. The author and or the LLP may hold a position in or trade in any of the securities mentioned above.
Disclaimer is a division of Stockcube Research Ltd which is authorised and regulated by the Financial Services Authority. The research provided by Stockcube on the Website (and any other Stockcube website) is provided solely to enable investors to make their own investment decisions and does not constitute personal investment recommendations. No recommendations are made directly or indirectly by Stockcube as to the merits or suitability of any investment decision or transaction which may result directly or indirectly from having viewed the investment research on the Website or having received it by email. Investors are therefore urged to seek independent financial advice if they are in any doubt. The value of investments and the income derived from them can go down as well as up, and the investor may not get back the full amount originally invested.

Bonds, as with all investments, are subject to price volatility and in the event of a default an investor may lose some or all of his or her original investment. This site also contains references to derivatives. These are particularly high risk, high reward investment instruments and an investor may lose more than his initial margin requirement. Some foreign currency instruments are also featured and if an investor decides to acquire any investment denominated in a currency different from the his or her own,  the investor should note that changes in foreign exchange rates may have an adverse effect on the value, price and income of the investment in the base currency.

None of the services provided as a result of this agreement constitutes a personal recommendation to invest from Stockcube and no service should be construed as such.  For the avoidance of doubt, where the word “recommendation” is used elsewhere in these terms it does not refer to a personal recommendation, unless this is explicitly stated.  The investments described by or in the services are not suitable for all investors. Investors  who have any doubt about whether particular investments are suitable for them should contact an independent financial adviser.

These services do not include personal investment recommendations from Stockcube and should not be construed as such. Stockcube may, at its discretion, provide information, advice, recommendations and research to subscribers from time to time on its own initiative or advise subscribers of other services available. Stockcube will be under no obligation to provide on-going advice in relation to financial instruments covered on this website.