alternative forms of finance sponsored by. alternative forms of finance sponsored by
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Alternative forms Alternative forms of financeof finance
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Alternative forms Alternative forms of financeof finance
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Adrian CarterAdrian Carter
Partner
Trowers & Hamlins
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Agenda
■ context/market■ bond issues■ private placements■ sale and leaseback■ Islamic finance■ Quasi-equity■ conclusions
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Context/market■ the Banks■ £3bn lent/committed in 2010■ but
■ bank’s own finance■ Term■ Margin■ Backbook re-pricing■ appetite
■ an obvious need to look at alternatives
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Bond issuesWhy suitable and why now■ historically attractive■ less so for last 10 years■ pricing has converged (5-6%)■ availability of funding■ long term (30 years)■ suitability for investors■ Clearly now a real alternative
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Circle Anglia £399m 11/10 7.25%
TFC £371m 04/11 6.35%
L&Q £300m 01/10 5.55%
Sanctuary £320m 09/10 6.69%
Hyde £200m 07/10 5.12%
Notting Hill £180m 07/10 5.25%
Peabody £200m 03/11 5.25%
Bond Issues
Recent Issues
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Bond Issues
■ series of IOUs■ listed on a recognised stock exchange■ marketed to institutional investors through financial
intermediaries (but, PfP retail)■ usually underwritten■ long term, fixed rate
What is it?
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Bond issues
■ offering circular■ bond trust deed■ subscription agreement■ lead manager■ rating agent■ security trust deed?■ financial and other covenants
Documents and parties
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Bond Structures
■ own name issues■ treasury vehicle as issuer■ on-lends to RP(s)■ which to choose?■ security trust deed■ marginal accounting advantage■ but, bank covenant compliance and guarantees
Structures
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Bond issues
■ groups and clubs■ issuer as an independent vehicle■ THFC■ HALOS/Haven/FFH etc■ GB Social Housing and others■ by far the most used model■ smaller loans/access for other than the very largest RPs
Structures
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Bond issues
■ size of issue (£150m+)■ timing issues■ real available source■ time consuming (security)■ short drawdown/no facility■ cost of carry■ covenant inflexibility■ but becoming increasingly covenant light■ a real alternative, available now
Pros and cons
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Private Placements
■ a direct sale by the issuer of debt securities■ another series of IOU’s■ to sophisticated investors■ long term investments
■ not for resale
What is a private placement?
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Private Placements
■ The market■ US$16bn in 1990■ US$839bn in 2005■ US$45.7bn (annual) in 2005
■ Originally domestic■ now US market is less than 50%■ UK accounts for c 10%
Investor Market
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Private Placements
■ Issues by transaction size■ majority between US$100-200m■ UK issues not less than £50m■ Currencies can be US$/£/€/Yen
■ Issues by maturity ■ 7-15 years c 75%■ 15-30 years 10%■ exceptionally – 50 years
Investor Market
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Private Placements
■ transaction preparation – information memorandum■ marketing – investor presentation■ circling – book building and pricing■ pricing and closing■ note purchase agreement■ US legal advice■ covenants drawn from domestic loans■ first fixed charge security
Process and documents
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Private Placements
■ long term fixed rate funding■ no rating required■ sophisticated investors■ speed of execution■ standardised documentation■ confidential market
Advantages
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Private Placements
■ flexibility of terms and structures■ reduced documentation requirements■ transaction costs■ issue size■ timing flexibility
Advantages
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Private Placements
■ investor inexperience■ no real investor/issuer relationship■ amendment process for documentation can be
lengthy
Disadvantages
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Sale and leaseback
■ disposal of freehold■ In return for a freehold interest■ premium receipt■ rental payment■ repurchase payment■ characteristics of a loan
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Sale and leaseback
■ tax and accounting treatment■ security effect■ covenant light■ real deals being negotiated as we speak■ available, if not yet proven
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Islamic Finance
■ a system of financing which complies with Islamic law■ acceptable means of financing for observant Muslims■ based on Islamic law (Shari’ah)
■ derived from Qu’ran and other sources■ not a codified system of law – different schools of interpretation
What is Islamic Finance?
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Islamic Finance
■ need to achieve justice and equity – social enterprise is favoured■ no profit without risk – but profit is encouraged, assets should be put
to profitable use■ will not finance unlawful (haram) activities eg gambling, alcohol, pork
products■ the Qu’ran prohibits payment of “riba” or interest■ obvious synergy – needs to be socially responsible and ethical for
operations
Principles of Islamic Finance
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Islamic Finance
■ there are approximately 300 Islamic financial institutions
■ US $400-500 billion of assets under management■ Islamic banks operate in 40 countries
Islamic finance worldwide
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Islamic Finance
■ UK – FSA has authorised 6 Islamic banks■ Islamic Bank of Britain is the only one with a retail business
■ some non-Islamic banks offer Islamic products
Islamic finance worldwide
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Islamic Finance
■ direct investment in RSLs unlikely because of requirement for high levels of debt finance
■ this would not prevent use of Islamic finance to fund individual projects or schemes
■ sale and leaseback model
Islamic investment in the social housing sector
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Islamic Finance
■ problem: Islamic investors likely to be looking for shorter terms 5-7 years – RSLs historically have required 20-30 years
■ but remember where banks now are ■ margins have been historically low but now increasing ■ so time to reconsider?■ interested parties, but no transactions yet
Islamic investment in the social housing sector
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Quasi Equity Investment
■ characteristics of RSL and Investor■ structural options■ exit arrangements■ things to think about
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Quasi Equity Investment
■ no profit distributions to shareholders■ access to HCA funding■ TSA registration
Characteristics of RSL
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Quasi Equity Investment
■ shares in risk and reward■ won’t want management hassle■ won’t want to jump more regulatory hurdles
Characteristics of Investor
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Quasi Equity Investment
InvestorRSL Business
Ring fenced assets
HCA
Funds
Return based on performance of asset
Funding
The virtual SPV
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Quasi Equity Investment
■ what is investor funding?■ cost net of grant ■ security for investor (if any) ■ performance based payment so no guaranteed
repayment■ incentives for RSL to manage well
The virtual SPV
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Tenancies
Rent based on performance of asset
Quasi Equity Investment
The lease model
Investor (freehold owner)
RSL HCA
Tenants
Lease
Rent
Funding
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Quasi Equity Investment
■ sale and leaseback – but no fixed return■ why a lease not a management agreement?■ avoiding irrecoverable VAT ■ insulating Investor from landlord role■ allow RSL to access HCA funding
The lease model
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Quasi Equity Investment
■ long term investment ■ at expiry:
■ hand back to Investor with VP■ buy at then market value or fixed price■ option or obligation? ■ HCA/TSA view important here
Exit arrangements
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Quasi Equity Investment
■ structural solutions possible■ need to attract investor interest■ scale and return will be key■ are RSLs interested in this type of model?
Conclusion
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Conclusions
■ dearth of banking lending ■ bonds can replace to a degree■ but there are limitations■ PP market in its infancy, surety more to come■ sale and leaseback imminent■ the rest is, so far, all talk
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