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Bond of the Week: 25 May 2018

New Retail Charity Bond - Belong 4.5% 2026 

    
New Retail Charity Bond - Belong 4.5% 2026

Please note that this article has been updated to correct some errors in the original

There is a new Retail Charity Bond. Here are the terms:

Issuer

Retail Charity Bonds PLC

Charity Borrower

Belong Limited  

Instrument

Bond secured on a loan to Belong Limited

Currency

GBP

Nominal Amount

GBP TBA

Retained Bonds

GBP TBA

Ratings

Unrated

Repayment

Bullet

Early Redemption

Gilts + 50bps

Coupon

4.5% Semi-annual in arrear

Coupon Dates

20 June and 20 December

Announcement (Launch)

23 May 2018

Offer Period

23 May to 13 June at 12pm

Signing Date

18 June 2018

AD Commission

0.25%

Issue/Settlement Date

20 June 2018

First Day of LSE/ORB trading

21 June 2018

Expected Final Maturity Date

20 June 2026

Legal Final Maturity Date

20 June 2028

ISIN Number

XS1821505259

SEDOL

[•]

TIDM

BEL1

Issue Price

100

Denominations

GBP100

Interest Day Count Fraction

Actual /Actual

Business Day Convention

Following Unadjusted

Listing

London Stock Exchange, ORB

Series Number

8

Selling Restrictions

Only to be sold into UK, Isle of Man and Channel Islands

Lock- up/ Seasoning

None / Tefra C

Governing Law

English law

Settlement

Euroclear, CREST, Clearstream

Lead Manager

Peel Hunt LLP

 

Those with a passing acquaintance of the national language of Vanuatu, Bislama, will know that belong is the most frequently occurring word. And they have a lot of villages. From there they may conclude that the charitable endeavour supported by this bond is the building of sustainable tree houses from which natives, vines tied round their ankles, can hurl themselves to land at the feet of Phil the Greek. [For further edification try Man Blong Mrs Queen]. However, those yet more familiar with Bislama will realise the issuer cannot be Vanuatuan or the charity would be Blong Vilej. The issuer of the RCB bond is in fact a Care Home provider from Crewe Junction.

Formed in 1991 by the transfer of 39 traditional care homes from Cheshire County Council, the charity has, over the last 15 years, steadily closed these homes and instead rolled out village style living under the brand Belong Villages. In 2016 the remaining traditional homes were closed/ sold so their care offer is now solely the village model. They have seven villages with four more planned. Their speciality is dementia care.

The idea (which I am all in favour of) is to make care less institutional. There are 152 people living in apartments (which they may own), 380 living in “households” and 201 people receiving domiciliary care. In their own words, the Belong Villages “promote wellbeing through homely, smaller group living arrangements”. With the exception of one village which had a problem which has now been sorted, the Care Quality Commission has passed their homes as either good or outstanding.

The average fees per (new) customer are now £1,000 per week so it is at the premium end of pricing, especially when you take into account that the villages are all in the North West - not the priciest part of the country. Prospective residents have to show they have an ability to meet three years of funding, although the average stay is 2 years. Other than the provision of care itself, a charitable element also appears in a degree of subsidy. Belong aims to subsidise residents who run out of funds and also (somewhat less satisfactorily) subsidises the local councils who do not pay the full cost. As I pointed out to the Chief Executive Tracy Stakes it is not so much that Belong is doing the subsidising (as they do not receive meaningful charitable donations) but that one set of residents is subsiding another set. She agreed and I suppose that is just the way it is in the care system at the moment. Not only do you have to use up savings at a phenomenal rate to support yourself you are also quite likely to end up supporting those who have been less diligent with their own savings. The degree of cross subsidy is £580,000 per annum at Belong. In the last 10 years Belong villages’ fees have been going up at 4-5% per annum so you wonder at what stage something cracks. I suspect eventually private care homes will refuse to accommodate council funded residents unless they pay the same as everyone else.

There is a degree of development risk as Belong build their own villages via Belong (Construction) Limited) a subsidiary of the borrower. However, they claim they now have expertise in constructing the village and what is as important as getting everything built on time and on cost is hiring the right staff and getting the organisation of the villages set up correctly. The demand is there and the villages quickly fill up. In their latest village they achieved the target occupancy rate of 70 out of 72 places (97.2%) by month 19.

 

Belong is not without entrepreneurial spirit and can spot a gap in the market. In West Didsbury, a short schlep away from Manchester, they have opened Belong Morris Feineymann, an Orthodox Jewish village; Latkes on Friday, Rabbi Kirsh and his wonderful wife Jackie on the Sabbath and schmaltz every other night of the week. I see it now; endless bespoke solutions - McTavish Tenements Glasgow (categ. economy) oats on Monday, oats on Tuesday, oats on …, pecuniary satisfaction for relatives assured. I could go on but the door bell has rung and I think it may be the hate police.


Now, in the best form of a care home manager, let’s talk about the money/ bill.
 

2013                 2014    2015                2016    2017

 

Residents (average)                1,296               1,300               1,203               1,085               855

 

Revenue per resident              25,890             26,269             27,941             29,919             34,666

 

Note; The fall in the number of residents in 2017 is a result of the disposal of the last of the traditional homes.

Total income                                                                           39.18mil          33.03mil          42,084mil

Expenditure                                                                            31.85mil          30.103mil        26.99mil

Net income                                                                                7.3ml               2.9mil            15.1mil

 

Tangible assets                                                                        56.1mil           59.7mil            56.5mil

There are some capital gains from disposal of the old homes which distort the above figures. For the 2015 accounts it was £5.6 million and for the 2017 it was £11.4 million. To strip this out you get approximate profit/ net income figures of £1.7mil, £2.9mil and £3.7mil.

 

The villages are recognised at book value in the accounts (£56.5 million) but they have an (unofficial) approximate value of £80 million – a valuation was done for the banks a year ago. Borrowings (excluding this bond) are £30 million but net debt is £20.4 million – they have a reasonable amount of cash from the sale of their last (old model) homes. They have a pension deficit of £11 million. As with other charity bonds there is the important covenant that there must be asset cover of 1.3 X unencumbered tangible fixed assets to total unsecured debt (i.e. this bond). To be clear, by unencumbered it means assets on which there is no senior ranking bank debt.

The proceeds of the bond will be used to finance the roll out of the village development plan. Their goal is to have 11 villages by 2021, up from 7 today. I understand they may fall a little behind schedule because of delays in getting planning permission.

As with most care providers they operate on rather thin margins. The breakeven occupancy rate is in the low 90s. To date they have managed to achieve that across their villages (allowing for an initial start-up phase of some 18 months). I expect as a charity they could not be seen to have too wide margins and if it were the case they would be under pressure to lower the fees.

Conclusion

The bond appears to be marginally generous and I shall buy some. The coupon of 4.5% exceeds that of the last charity bonds which have had coupons ranging from 3.9%-4.25%. Even taking into account that there is an element of development risk about Belong and that they are in the care sector which has not been without its financial problems, I think the risk is quite good. Not only do they appear to be well run, there is no denying the demand for care and the good will towards charity providers. And then there is the asset cover covenant. Therefore this bond should be a good place to let your money rest while awaiting a more fruity investment. As a broker closely associated with the deal told me, there is a very subtle subliminal message associated with the issuer; Be Long.

 

ODRB

 

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