HBJ Gateley’s Susan McDonald on the lessons learned from bond funding as a means to finance social housing associations.

Whilst there may not have been as many bond funding deals within the Scottish social housing sector compared to England, having now been involved with half of such deals that have completed north of the border, there are now clear and identifiable benefits for Registered Social Landlords (RSLs) entering into this form of funding arrangement.

So, what are the lessons learned from the various deals done so far?

Bonds are more easily available than you might think

There seems to be a perception that bonds are only available on a large scale with principal loan amounts in excess of £50 million as the majority of English bonds had been at that level. However, that perhaps reflected the scale of the deals in England where borrowing at that level is more usual given the significant stock numbers of housing providers.

As the average stock level is much lower amongst Scottish RSLs likewise the funding requirements are much lower with borrowing requirements more often nearer £10-15m. Thankfully whilst initially it may have been the case that bonds were at a higher level – certainly the first bond arrangements in Scotland such as the combined Hillcrest/Caledonia Housing Association arrangements did involve a principal debt of over £50m – this is no longer the norm.

We recently acted for Paragon Housing Association to secure a £10m facility from GB Social Housing and the bond providers do not view this as a one off. They are aware that many RSLs in Scotland are looking for bonds on this scale and are no longer limiting themselves to bonds at the higher level.

Bond providers are not exclusive

No doubt linked to the perception that RSLs had to be borrowing multi-millions to justify a bond, was the similar view that social landlords would effectively have to put all of their eggs in one basket and have the bond provider as their sole funder.

This again is no longer the case and the Paragon bond funding was a combined arrangement with standard debt finance being provided by the Royal Bank of Scotland. This arrangement worked extremely well giving the landlord the balance between short term debt finance and long term secured funding through the bond.

Bonds are expensive

Obviously the cost of finance will vary from customer to customer but, in comparison, bond funding is no more expensive to put in place than standard debt. As a result of the pricing tap process, borrowers may not know the exact interest rate which will apply until late on, but providers are well-placed to read the market. In the deals we have been involved in, the final rate has not varied significantly from the providers’ indicative price.

Perhaps more surprising is that in terms of legal fees there should be little to no difference in fee levels from a standard debt funding arrangement. The legal work involves the same elements in terms of banking and property work and as such customers should not be required to pay a premium on their legal fees because they are entering into a bond rather than standard debt arrangement.

Overall the RSLs in Scotland who have entered the bond market have all spoken highly of the process and whilst it may not suit everyone it should certainly be considered by any RSLs looking to review their borrowing approach given the benefits it can deliver in terms of long term security.