Autumn looks set to be a busier time for the London Stock Exchange's Orb retail bond market after social housing provider A2Dominion hit the road with a potential bond offering. The charitable company, which develops and runs a mixture of social and commercial housing stock exclusively in London and the south-east, is looking to raise around £140m. The company will use the money to underpin its housebuilding programme over the next few years, as well as to begin the process of diversifying away from bank debt.
At this stage, the details of the bond have only been sketched in outline, but the company has since confirmed that it will offer a coupon of 4.75 per cent, which does not put any upward pressure on its average interest rate charge. This would come with an AA- rating from ratings agency Fitch and a maturity of nine years, and would be unsecured against any tangible assets. The bond is being marketed as Orb-friendly with a £2,000 initial subscription, with £100 increments thereafter.
Social housing providers have traditionally relied on banks for almost all their long-term funding needs. Social housing was always a priority for lenders because the sector has a similar portfolio of recurring revenue streams to those that make utility companies such stable long-term investments. This fact is reflected in A2Dominion's debt profile, which shows that more than 90 per cent of its outstanding bank debt, some £800m, has a repayment schedule that stretches out over 20 years. The issue of a retail bond, which is not secured against any of its properties, is the first step in diversifying its funding profile away from a reliance on financial institutions, who are apparently no longer willing to lend for such long periods of time.
This may be because the social housing sector is currently in a state of flux because of changes to government grants, a benefits cap and the so-called 'bedroom tax'. A2Dominion's management reckons these changes have little bearing on its current rent roll as only about 11 per cent of its tenants are on full housing benefit and over half pay rent directly to the company, rather than through the benefits system. The company has also started to diversify into market rental properties in order to make a commercial return that can then be reinvested into social housing programmes.
