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Bond of the Week: 10 October 2017
Hightown Charity bond 4% 10 years
    

Hightown Housing Association, issuer of an existing 4.4% 2025 retail bond, has returned, bowl in hand, and asked for MORE. Do they deserve it? Here are the terms.

 

 

Issuer

Retail Charity Bonds PLC

Charity Borrower

Hightown Housing Association  

Instrument

Bond secured on a loan to Hightown Housing Association

Currency

GBP

Nominal Amount

GBP [•]

Retained Bonds

GBP [•]

Ratings

Unrated

Repayment

Bullet

Early Redemption

Gilts + 50bps

Coupon

4% Semi-annual in arrears

Coupon Dates

31 October and 30 April

Announcement (Launch)

10 October 2017

Offer Period

10 October to 24 October at 12pm

Signing Date

27 October

AD Commission

0.25%

Issue/Settlement Date

31 October

First Day of LSE/ORB trading

1 November

Expected Final Maturity Date

31 October 2027

Legal Final Maturity Date

31 October 2029

ISIN Number

XS1695541299

 

 

Hightown is a housing association that has been able to take on charitable status (because it is a substantial provider of “care”). This gives it some tax advantages and incidentally means they avoid “right to buy” (understandably they are reluctant to alienate their assets, particularly at a discount to market value). They are regulated both by the HCA and the Care Quality Commission. This bond, like the last one, is issued under the Retail Charity Bond umbrella. You can find what I previously wrote here.

 

The new bond is to finance further expansion of Hightown’s housing stock.  The business is substantially the same as when I last wrote, albeit it is somewhat larger. They currently manage and own 5,300 residential units, an increase of 20% since their last bond in 2015. The proceeds of this bond will allow them to pursue the growth plan of adding 350 units per annum. They operate, as before, in Hertfordshire, Bedfordshire and Buckinghamshire, all prosperous areas of the country. From a credit perspective this is positive for two reasons. It supports housing valuations (their asset base) and because housing is expensive in these counties it increases demand for subsidised rents and therefore the services of Hightown.

They have provided a breakdown of changes in sources of revenue between 2014 and 2017. The changes are not large but here they are:

 

Source of Revenue                              2017                2014

General Needs                                   38.8%              36.9%

Supported Housing                            31.1%              26.6%
Shared ownership                              20.1%              25.8%

Care and Nursing                               7.8%                8.2%

Others                                                 2.3%                2.6%

There has been some move away from shared ownership to general needs and supported housing. In theory this could be seen as slightly credit enhancing. Local authorities are obliged to provide general needs and supported housing (guaranteed demand) and shared ownership (a joint venture with another party) has potential risk via the performance of a third party. A counter argument might be that providing care introduces more operational risk. Either way I do not see that there has been a meaningful change in their credit from an operational standpoint.

 

As they build and develop (additions to the stock only come via new builds) so the proportion of modern homes increases. At present 68% are post 1994 builds and only 5% pre 1954. The newer the home the less the maintenance and running costs. Also, of course, the newer the less charming. I see from various photos supplied that Hightown is doing their bit to help plough over what remains of the English countryside in the South East and replace it with square boxes with small square double glazed windows in Scandinavian municipal car park style. But this site is about money not architecture; let’s move on.

 

A couple of other points on their housing stock are worth mentioning. 81% of their units have two or fewer bedrooms, so limiting their exposure to the Bedroom tax and 70% are low rise flats which improves efficiency of management and maintenance costs. The management also said they only had one building with a cladding problem and that was a new build. Therefore although it will cost money (unless, as they suggested, the government provides – get that bowl out again) no one needs to be evacuated.

Here are the main figures from the Income Statement and Balance Sheet comparing 2015 and 2017.

                                                2017                            2015
 

Turnover ex Sales                    53mil                           39.5mil         +34.5%
Operating Costs                       30.8mil                        20.9mil         +47.4%
Shared Ownersip Sales           9.4mil                          6.6mil            +42.4%
Operating Surplus                   19.5mil                        16.4mil          +19%
After tax surplus                      16mil                           12.6mil          +27%
Interest cover                           305%                           260%

Fixed Assets                            £531mil                       £434mil        +22.3%
Current Assets                         £27.8mil                      £15.3mil       +81.6%
Assets less Curr. Liab.             £537mil                       £437mil        +22.9%
Total debt                                £297mil                       £231mil         +28.5%
Debt to Assets                         55%                             53%

The housing stock is held at cost, or depreciated cost. Therefore the housing that has been held on their books for a long period will be held on their books at a very substantial discount to the market value. Approximately their assets are valued at £100,000 per unit – which intuitively seems very low. The average cost of their debt is 3.03% (this will include secured debt).

It is also worth adding that the bond has a covenant whereby they must maintain unencumbered property at a proportion of 1.3 to bond debt. Unencumbered, for the avoidance of doubt, means property that does not have a secured mortgage on it so surplus equity in mortgaged blocks cannot count towards the 1.3 X.

Comparative value. Their existing issue Hightown 4.4% 2025 @ a mid-market price of 105.125% yields 3.62% or Gilts +2.56%. The two recent charity bond issues, Greensleeves (care homes) 4.25% 3/ 2026 and Dolphin Square (provider of subsidised housing) 4.25% July 2026 yield and 3.86% and 3.94% (care homes are considered slightly lower down the credit scale).

Conclusion. The Hightown bond is a safe credit and at 2.64% over the 10 year Gilt it represents reasonably good value versus what is available for good credits in the institutional markets. This is not to say, of course, that the yield is exciting. I think there is also the wider thought that given its status as a charity and provider of subsidised housing, should Uncle Jeremy and his cohorts march into Downing Street, Hightown will be sitting (relatively) pretty.

The risk that is probably most significant is interest rate risk given that the bond is long, and the return low. Personally I think an interest rate rise may finally be upon us in the near future. However, it will probably for the moment be limited to 1/4% or a reversal of Carney's post Brexit cut. That should not be enough to frighten the horses and it is being well signalled.

Returns offered in the market for capital are low but global risks (both economic and political) are very apparent. We have a (very) ageing equity bull market, the US and UK central banks are starting to at least contemplate tightening credit and political turmoil could suddenly return to Europe (or maybe it has already). Given this the Hightown offers a safe harbour for cash while we wait to see what turns up. Just sitting on cash has its cost and you could have been making the argument for cash for the last 10 years, thereby failing to participate in some great returns. I shall be buying some bonds.

ODRB

 

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.

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