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Bond of the Week: 3 November 2017

Golden Lane 3.9% 2027

    
Golden Lane 3.9% 2027

Golden Lane, a provider of housing in the charitable sector, has just launched a bond under the RCB umbrella. This is their second bond. The terms are:

  • Issuer: Retail Charity Bonds PLC
  • Charity Borrower: Golden Lane Housing
  • Instrument: Bond secured on a loan to Golden lane
  • Currency: £
  • Ratings: Unrated
  • Coupon: 3.9% S.A
  • Coupon dates: 23rd November and 23rd May
  • Launch date: 1st November
  • Offer period: 1st November to 15th November
  • Settlement date: 23rd November
  • Maturity: 23rd November 2027
  • ISIN:  XS1713569629
  • Issue price: 100
  • Denominations: £100
  • Listing: LSE
  • Settlement: Euroclear, CREST, Clearstream
  • Lead Manager: Peel Hunt LLP

I previously wrote on Golden Lane and you can find what I wrote here. As with the recent Hightown charity bond, little has changed since their first issue. However, it is worth a whirlwind recap.


Golden Lane Housing (GLH) was founded by and is wholly owned by Mencap. GLH specialises in providing housing to people with learning difficulties so they can live in the community. They do this via rented accommodation, share ownership and the management of trusts once parents are no longer around (or perhaps are residing at Greensleeves Care Homes: RCB 4.25% 3/2026; that’ll be £1,000 per week please)

 

GLH do not provide the care – just the housing. [Mencap is the largest (36%) but not sole provider of the care side]. As of March this year they had 1,645 tenants in 798 properties. These properties are spread round the country ( in over 100 local authority areas with approximately 50% in the North and 50% in the South). This leads to an increase in administrative costs compared (for instance) with Hightown which has a much more localised franchise. However, as GLH expand so there is increasing cost efficiency. I also understand that councils are aware of their higher cost base and are willing to pay a rent that allows for this.

 

GLH does have one advantage over Housing Associations. As their tenants have learning difficulties the housing benefit goes straight from the government to GLH without passing through anyone else hands. This compares to the new standard introduced under Universal Credit where the intermediation of the tenant into the flow of money (in order to engender responsibility) has allowed rent, on certain occasions, to go astray.


Here are some useful facts and figures. Vacancies average around 5%. The buildings are valued at an historic cost of £98 million (i.e. they are neither valued up or down). When asked, the Finance Director said he thought the actual market valuation would be some £100 million higher. Of course should the property market turn in a substantial way you would not see this reflected in the balance sheet. Of their 798 properties, 429 are owned, 369 are leased from private landlords and 38 are managed. In 2012 their portfolio was around 400 properties so there has been a steady increase in the portfolio.

 

The issue size of this bond will probably finish at around £15 million. Its primary purpose is to pay off an existing private placement bond issued in 2013 with perhaps a few million put aside for further expansion. Some retained bonds will be issued to allow for further small scale fund raising.

Here are extracts from the Income and Expenditure Statement and the Balance sheet

                                                            3/2015             3/2016             3/2017

 

Rental Income                                     11.3mil 12.4mil            13.6mil

 

Grants                                                  0.2mil              0.2mil              0.3mil

Other Income                                      0.68mil            0.74mil            0.73mil                       

Gains/ (loss) on disposal of                 0.013mil          0.028mil          0.25mil
fixed asset

Other Costs                                         (8mil)               (8.8mil)            (9.4mil)

Interest                                     (1.78mil)          (1.85mil)          (1.9mil)

Depreciation                                        (0.8mil)            (0.9mil)            (1mil)
 

Net surplus                                         1.7mil              1.75mil            2.56mil

 

 

Fixed Assets                                        85mil               89mil               90mil

 

Cash                                                    4.9mil              7.4mil              8mil    

 

Other Current Assets                           0.8mil              1.15mil            1.14mil

Current Liabilities                                (3.3mil)            (2.9mil)            (3.1mil)

Long term liabilities                             (63.5mil)          (68.7mil)          (67.5mil)

 

Net Assets                                           24.36mil          26.11mil          28.66mil



As is usual for charity bonds, there is a covenant requiring borrowing to be covered 1.3 X by unencumbered (i.e. un-mortgaged) assets. However, unlike Greensleeves and Hightown they do have a certain amount of secured lending and they do intend to keep secured as part of the mix of borrowings. Their non-bond borrowings are: £9.15mil 2028 amortising subsidised loan from Mencap at Base – 0.5%, £20 million 2027 Nationwide loan and three Triodos Bank (who are they?) loans (totalling £29mil) maturing 2031-2036. Using the historic cost accounting method for their assets I make that an LTV of 75%. Allowing for an additional value of £100 million to reflect current market valuations it would be an LTV of 35%. But beyond any consideration of asset coverage I just do not think the “authorities” would allow such an enterprise to fail providing they were not seen to be indulging in the sort of shenanigans seen at The Kids Company.

There is no doubt that GLH does provide a very valuable and admirable service. But there is neither time nor space to go into the background story. I believe with the launch of their first bond they actually took some of their tenants for a day out to the Stock Exchange to celebrate. Of course, as my cynical colleague Mr. Littlejohn pointed out, logic would dictate that if it is morally advantageous to buy this bond there presumably must be a particularly warm spot in hell for anyone who shorts the issue. Beware oh market makers!

Conclusion: The yield offered on successive charity bonds has ratcheted in: in March 2016 Charities Aid Foundation came with 5% for 10 years, in March this year Greensleeves with 4.25% for 9 years, in August Dolphin Square also 4.25% for 9 years, in October Hightown 4% for 10 years and now Golden Lane 3.9% for 10 years. The Gilt market meanwhile has been somewhat volatile but it is still trading within the same range. And yesterday the BofE finally raised rates. 

 

With good reason Golden Lane is seen as particularly high scoring in terms of their positive social impact. The issue will certainly be well received by SRI (Socially Responsible Investing) funds. I expect demand relative to issue size to be good. But let's face it; GLH are offering to cross your palm with tin not silver. Considering the sound economic proposition there is some value left in this bond on a relative value basis but 3.9% is not much to write home about. With a ten year maturity there is plenty of interest rate risk.

 

Alea iacta est: at 3.9% the charity bondwagon has crossed the 4% Rubicon and is merrily trundling on to Rome in every expectation of a rapturous reception from the starry eyed virtue seekers of the SRI funds. But, we all have our personal Rubicons and I don't fancy getting my feet wet. Enough is enough and I shall not be investing. Instead I shall be ringing the bell and calling out, "Time gentlemen please!".

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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