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Piers WilliamsonPiers was appointed Chief Executive of THFC in 2002. He offers 30 years of valuable experience, gained across the UK, US and European ...more
The pros and cons of US private placement funding
As Brexit volatility hits the UK market, housing associations are reportedly looking over the Atlantic instead to raise money through private placements. Piers Williamson assesses the benefits and risks
Talking to Her Majesty’s Treasury, one of the unique selling points of English housing associations (and hopefully those in the rest of the UK if they can sort their public classification issues out) is the ability to invest significant long-term private finance in affordable housing development, off the government’s books.
To date, the English sector alone has sourced £90bn of finance.
Around two-thirds of this finance is sourced from a small group of UK clearing banks and building societies.
The remaining third has historically been sourced (almost exclusively on a long-term matched basis) from the largest UK annuity, insurance and tracker funds.
Over 30 years, thanks partly to the downward trend in long-term interest rates (at least since Exchange Rate Mechanism withdrawal in 1992), the government has been able to alter progressively its investment formula in affordable/social housing from high grant/low debt to low grant/high debt – making scarce public investment ‘go further’.
“US private placements represent genuine investor diversification”
Relatively freely available low-cost, long-term finance for housing associations has been an important enabler in all of this.
The Housing Finance Corporation (THFC) evidenced this, running the Affordable Housing Guarantee Scheme (AHGS), when it raised £3.2bn of long-term funding at an average all-in cost of below 2.5%.
Ironically, the very cheapest funding of the lot was sourced from the European Investment Bank (which funds itself in a basket of currencies) in the teeth of the Brexit referendum when, for a period, the AHGS was funding housing associations below the UK government’s own cost of funds.
There was a (albeit higher cost) version of currency market imbalances in the lead up to Christmas last year when the relative strength of the US dollar versus Sterling, combined with an interest of US mutual funds and insurers to fund UK housing associations, led to a lower cost than (UK) domestically-sourced private placements.
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Given that a housing association’s finance director’s mandate should be to source low-cost, long-term funding, are US private placements a significant source of funding going forward? And what might the pros and cons of accessing this market be over the coming months and years?
Systemically our private finance model faces five contemporaneous squeezes:
- Consolidation of housing associations (leading to limit concerns from investors)
- Consolidation of investors (not much thought about to date but a growing issue, leading to the same limit issues)
- Perceived higher-risk development models for housing associations leading to progressively lower (albeit still investment grade) ratings
- Limited available security to feed the classic secured debt proposition for housing associations
- Brexit-related potential pressure on the sovereign rating (and consequent potential for systemic downgrades of housing association ratings, unconnected to their core performance)
US private placements represent genuine investor diversification and in the short term, their risk appetite combined with desired return appear to fit the bill.
Not all money raised is ‘new money’ (in many cases core banks are being refinanced) but the long-term nature of the funding eliminates refinance risk.
Like any long-term engagement though, the nature of the relationship needs to be sustainable. My experience is that if there appears to be an obvious winner or loser in the deal then there is very likely to be some actual or attempted falling-out by one of the parties in the next 25 to 35 years!
US investors are no different in their commercial drivers than UK investors. Beware though of the added cost in any divorce or restructuring of long-term currency movements – which have the capacity to make the cost of UK debt refinancing look like petty cash.
“Are you likely to restructure your debt at some stage? If so, a US private placement will need to be very carefully negotiated”
So, if you are considering a US private placement… before you become too enthralled with the idea of a US roadshow to cities that, to date, you perhaps only associate with Chuck Berry’s greatest hits, take time to understand the risks.
Also take time to understand your own business’ long-term strategy. Are you likely to merge? Are you likely to restructure your debt at some stage? If so, a US private placement will need to be very carefully negotiated, or you could work with investors or institutions like THFC closer to home that have longer-term goals that are, arguably, more congruent with your own organisation’s sustainability.
In any event, as we begin to get our brains around kicking the Brexit can down the road, the US market itself may have its own issues.
The US government has only just resolved the longest federal shutdown in history and there are signs that growing trade-wars may impact US domestic growth.
Either way, the US investor base which has now been established deserves proactive and consistent communication of the credit story from UK borrowers. Maybe more of us will be humming Check Berry hits in the future!
Piers Williamson, chief executive, The Housing Finance Corporation
