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Analysis & Comment  > Bond of the Week

Bond of the Week: 9 March 2017

Retail Charity Bonds PLC for Greensleeves Homes Trust

    

New retail Charity bond

Greensleeves Homes Trust (a care home owner and operator) is issuing a retail bond under the retail charity umbrella. Here are the terms.
 

Issuer

Retail Charity Bonds PLC for Greensleeves Homes Trust

Format

Issued by Retail Charity Bonds, secured on a loan to Greensleeves Homes Trust

Expected Bond Rating

None

Subscription Period

7 March 2017 to 12 noon 24th  March 2017 (may close at short notice)

Settlement

30 March 2017, via Euroclear, Crest or Clearstream

Expected Maturity

30 March 2026 (9 years)

Size

TBC but will include Retained Bonds

Coupon

4.25% p.a., semi-annually in arrears on 30 March and 30 September each year

Issue Price

100

Listing

Official of the LSE and traded on the London Stock Exchange Order Book for Retail Bonds

Sales Restrictions

UK, Channel Islands and Isle of Man only

Denoms

GBP 100 (minimum subscription GBP 500)

Lead Manager

Peel Hunt

ISIN

XS1575974933

 

Greensleeves, originally part of the Women’s Royal Voluntary Service, was incorporated as an independent charity in 1986. They provide somewhat upmarket care homes. Many were originally donated in the post war years when the well-to-do were disposing of large and damp houses in the country whose upkeep weighed heavily on the family budget in the new reality of not so well-to-do post war socialism and quasi socialism.

Greensleeves own 20 homes, 19 as freeholder and 1 as leaseholder. The majority are in the environs of London and East Anglia with a couple near Birmingham, one in Bristol and one in the Isle of Wight. They provide long term not short term care, although long term turns out to be (vita brevis) only 1.89 years.  As at the end of 2016 the homes housed 789 “beneficiaries” (as they describe them). They have won various awards and all homes are run by Care Quality Commission (CQC) registered managers. However, I shan’t trouble the reader with more on this front as I expect you to be viewing this bond through the ruthless prism of capitalism. Time to take a leaf out of the book of the care home sector itself. Let us discuss the money.

The bond on offer is not a secured bond but the business itself is nevertheless backed by a substantial property portfolio. This is valued (on an existing use basis) at £43.1 million. Although a charity, the business is run as a business (but with the retention of any surplus) and every home is intended to and does generate a surplus. They do not rely on charitable donations to run their homes. Their financial outcomes (not my words; perhaps some linguistic slippage here) show the charity has made an EBITDA profit for the last 5 years (I only have figures going back that far) and with a retention of the surplus each year.

Year                 Turnover          EBITDA                        Surplus
 

2012                £16.1m            £1.6m              £0.089m
2013                £18.2m            £2.82m            £1.35m

2014                £19.2m            £2.35m            £0.5m

2015                £20.14m          £2.39m            £0.95m           

2016                £24m               £2.3m              £0.42m

Here are some other points worth noting about Greensleeves which aid assessment of the credit of the bond offering. For the last 5 years, occupancy levels have ranged from 92-95% (given turn-around time it can never be 100%). Charges are “in the upper half of the spectrum” and they have, relative to other care homes, a high proportion of privately funded residents who pay more, and in the current economic environment can be squeezed further, than the local council. The average charge per paying resident is £800. Councils pay only £500. Many working in the care sector receive only the minimum wage. Greensleeves has a policy of paying all above the minimum wage level. The plausible argument is that although this increases overheads, even if wage levels above the legal minimum are modest a differential means better staff and better retention rates of staff(sector average turnover is 21.7%, for Greensleeves  it is 14.8%). It is a tough job working in the care sector and most are not paid well so it is difficult to begrudge Greensleeves’ modestly generous wage policy.


Having met the management they present a good case for a well-run business very much concentrated on the principle of making it pay plus a suitable caring attitude. Their standards of care are good and the homes appear as attractive as you could hope for them to appear. That in itself is encouraging for a bond holder, as reputation for a care provider is the sine qua non.

What does the debt structure pre and post the bond’s launch look like? As of 2016, total debt is £ 11m (secured) and net debt is £10m. The bond (targeted to be a £30 million issue) will leave the charity with nil secured debt, a £30 million bond, cash of £19 million and net debt of £11 million. This leads us on to the rationale for the bond; expansion. This bond will provide Greensleeves with the ammunition to buy and fit out further homes. Some increase in capacity has already been taken place. “Beneficiaries” have gone from 512 in 2008 to 789 last year with a Board strategy to expand to 1,000 by March 2023. 

 

With expansion comes risk and here are the covenants to protect bond holders. 1) Greensleeves will not have any secured debt post the bond issuance and with a large cash surplus this is likely to persist for quite some time into the future. However, they are permitted to take on secured debt but it can never be more than 25% of assets. There should always therefore be substantial asset backing for this bond. 2) More importantly there is an Asset Cover Covenant of 1.3 X unencumbered tangible fixed assets. For the avoidance of doubt, if a home has any secured debt on it then the equity value of that home cannot count towards the asset cover because it is not unencumbered. This actually acts as a disincentive for Greensleeves to issue any secured debt (except on a short term basis or when acquiring a home with an existing mortgage on it). Therefore it is reasonable to assume, for quite a few years into the future and maybe until maturity, that the bond will have the first charge over the assets. It will be de facto if not de jure a secured bond.

Some observation on care homes with special reference to Greensleeves. There are some very evident trends in social care that everybody is aware of.  1) Demand is rising strongly; the number of those over 65 is projected to double between 2011 and 2051. 2) The cost of social care is outstripping inflation (Greensleeves factor in a 5-8% annual wage inflation between now and 2020 because of the rise in the minimum wage) and it is already very expensive (Greensleeves average cost is £800 per week). 3) Neither the government, councils nor increasingly many pensioners have enough money to pay for it. Although this background may make investors nervous, the pragmatic approach is to say there are old people who will need looking after and they will get looked after one way or another – it is only a question of who will be doing it.

Within the sector it is reasonable to assume, both because of cost pressures and the ever increasing burden of compliance and red tape, that smaller operators will continue to be squeezed out of the market. Likewise there is likely to be pressure on homes to maintain good standards; encouraged, I imagine, by the occasional scandal unearthed by investigative journalists. This should mean that an operator such as Greensleeves with a good reputation, economies of scale and able to wave the wand of virtue as a charity, will do well.

It is notable, when looking at the accounts, that Greensleeves’ head office costs have increased substantially in the last five years (they have doubled) whereas turnover is up 49%. I questioned them on this. The explanation is they have geared up the head office (largely completed) prior to expanding. Going forward head office expense as a proportion of turnover should decrease as the expansion is rolled out. I think this shows the necessity of having strong central control and monitoring. They felt they could not embark on a serious expansionary phase until they had the head office administration in place. The running of care homes may no longer be for amateurs.

Greensleeves make a point of emphasising they are less reliant on local authority funding (75% privately funded) than most care providers. This is viewed as a strength – it shows demand for their spaces. And more importantly the councils only pay £500 as opposed to £800 for privately funded residents. Spaces first go to those who are paying for themselves and then the charitable element comes in in the form of a discount charged to councils. Of course it occurs to me that at some stage there may be a rebellion (and possibly there is already resentment) that not only do some get free care and others do not but that one inmate who not only pays but pays over the odds will be subsidising another; or the private resident is subsidising the state sponsored one.  There is also the ever present question as with all systems run on entitlement (or in this case on free or subsidised care to some but not all) of who the faceless bureaucrat or commissar deems should receive and who should not. Or perhaps more realistically who has relatives who are savvy enough to play the right angle to get subsidised care. Some are clearly entitled and some are clearly not but there is a large grey area. Given the above there may therefore be some benefit for Greensleeves in maintaining as much distance between themselves and the state as possible by trying to have a high proportion of privately funded residents.

Conclusion.  This new retail charity bond is not secured but in practice the bond holder has the backing of a substantial property portfolio and they may indeed find no secured debt is ever put on by the issuer that ranks in front of them. Given investors are faced with the likes of a just launched hybrid (subordinated) Scottish and Southern Electricity  bond paying 3.875% for 60 years (now trading at a two point premium!) the Greensleeves bond represents relative good value and may well trade up to a modest premium.

Despite this, my initial conclusion was that, Linda Evangelista-like, I do not get out of bed for 4.25% - at least not while I am able to rise without the help of nurse. Maybe I was also influenced by the thought that someone who is a 40% tax payer would have to buy over £1 million of these bonds in order to fund just one residency. The entire issue would fund fewer than 30 residents. A neat illustration of interest rates that are oh so low and the cost of social care that is oh so high.

However, I have revisited my decision. I shall be applying for some bonds albeit for negative reasons. My clients and I have cash balances. Currently the custodian, like most custodians, charges negative interest rates. (Does yours? Have you checked?) To not invest is therefore particularly unattractive. Moreover, given the dearth of ordinary bonds worth buying, any cash left lying around is apt to go to speculative investments. I am all for opportunistic investments and special situations but the danger, as yields remain low for so long, is that there is constant mission drift until most of your assets are at the casino. Maybe this charitable care bond is a useful prophylactic?

A parting thought. Various brokers, idle and cynical, have suggested an on-site visit to a Greensleeves home or two should have been organised. And then some of the more elderly and less well performing (from a broker’s perspective) fund managers could have been left behind. Reader you may perceive yourself within the previous sentence. If so consider buying the bond. Or avoid any proffered out of town jollies; else you might be wondering where you are and how you got there. In the fading light Ludmilla wheels you into the circle in the magnolia room. “Would you like some soldiers with your boiled egg dear? Open wide.” Invest or fade away; perhaps a good principle for all market operators.

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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