In difficult market conditions with a heavy existing debt burden, Annington Homes was still able to issue the largest ever debut high-yield bond in the UK thanks in no small part to an impressive pre-marketing campaign by Barclays.
Annington Homes is a collection of more than 40,000 properties mainly in the south-east of England. The residents are married members of the UK armed forces and the rent is paid by the country's government. At first glance, therefore, a bond transaction secured against such assets would seem to be an easy sell. In Annington Homes’ case, however, the situation was rather more complicated.
For years, the Married Quarters Estate (MQE) was owned by the UK Ministry of Defence (MoD), but in 1996 Japanese bank Nomura acquired the homes for £1.67bn ($2.69bn). The MQE, comprising 57,434 properties, became known as Annington and was run by Nomura’s principal finance arm.
Fast-forward to 2011 and Annington Group was on the market again. Terra Firma, chaired by Guy Hands, was the obvious buyer. He had run Nomura’s principal finance division throughout the 1990s before spinning it off to create Terra Firma in 2002. After the spin-off, Mr Hands continued to manage Annington on Nomura’s behalf. Buying Annington outright, however, was not a simple proposition as the business was saddled with debt.
“A 25-year facility with several tranches was issued originally, secured against the Annington estate and there is still about £2.2bn of debt outstanding,” says Mr Hands. “We negotiated a price with Nomura. Then we had to work out how to finance it."
Nomura required £1bn on top of the existing £2.2bn of debt. In a bull market, Mr Hands may have been able to secure the extra cash with ease, but in the credit environment of 2011, the challenge was far greater.
“We held a beauty parade of banks at the back end of 2011 and they all had very different suggestions. Some suggested a complete restructuring of the debt; some suggested negotiating with existing bond holders; some suggested a pure equity deal; and some suggested raising the £1bn through a combination of debt and equity,” says Mr Hands.
High subordination
Terra Firma spent several months evaluating the options, talking to banks and assessing market conditions. Finally, the group awarded the mandate to Barclays in August 2012.
“Restructuring would have been too expensive, negotiation would have been too protracted and the cost of equity alone was too high, so we thought a combination was the best approach. Barclays had suggested that and we chose the bank as bookrunner because we believed in its ability to deliver,” says Mr Hands.
Initially, discussions centred on a £500m high-yield bond issue and £500m of equity. From the start, however, it was clear that the bonds would only appeal to a specialist audience because they were always going to be subordinate to the existing £2.2bn of debt. Attention was focused therefore on UK-based investors with a strong knowledge of the local residential real estate market and structured finance.
“Barclays did an extensive pre-market exercise and we then had a three-day roadshow in London and Edinburgh, where we held a series of one-on-one meetings,” says Mr Hands.
The meetings took place at the end of November 2012, during which time Barclays and Terra Firma explained the details of their proposal – a 10-year, payment-in-kind (PIK) transaction with a coupon of 13%, callable after five years. Under the PIK terms, investors will receive new bonds in lieu of cash until certain tranches of the original debt are repaid, probably in two or three years.
Winning the battle
The assets required explanation too. Over the past 18 years, the Annington portfolio has reduced from 57,000 to 40,000 as homes have been sold off. Until November 2011, the proceeds were shared between the MoD and Nomura. Since then, Annington has been the sole beneficiary and there are high hopes of further disposals over the coming years. More than 6000 homes are unoccupied at present and reductions in the armed forces have been widely publicised by the government. Even if homes are not sold, upward revisions in rents are expected as they are currently set at a 58% discount to the market.
“The key value drivers for Annington are the strength of the lease, the rental income and the possibility of future sales, particularly as most of the homes that have been sold over the past 18 years have been sold near market value,” says Mr Hands.
Despite Terra Firma’s enthusiasm for Annington and despite Barclays’ adroit pre-marketing of the PIK notes, Mr Hands admits he was nervous about how investors would respond when the transaction was formally launched. “Barclays did a very good job of informing us about market conditions and investor appetite but it is always a bit nerve-racking on the day,” he says.
Ultimately, however, the response was significantly better than expected. The deal was comfortably over-subscribed and the amount was increased from £500m to £550m, making the deal the largest ever high-yield transaction from a debut issuer in the UK and allowing Terra Firma to raise £450m in equity, rather than £500m.
“Barclays said it could deliver and it did. I don’t say this often but the bank did a superb job,” says Mr Hands.
