Following a near doubling of the cost of long-term funding, capital markets activity in 2023 was a rare occurrence. As a result, for registered providers (RPs) 2023 saw much more of a shift towards shorter-term bank finance and an increase in uncommitted products with only glimpses of capital markets deals.
Positively, 2024 has already seen a stronger opening of the capital markets. The headline in the Financial Times as I write this is 'UK Corporate Bonds Revival' with a piece on pension funds 'piling into UK corporate bonds'. The Banking & Finance team at Trowers & Hamlins have advised on the £400 million issue by Sovereign Network Group (January 2024) and the establishment of Peabody Trust's £1 billon Medium Term Note Programme (February 2024) and there are a number of RPs actively preparing for issuance whether that be for a bond, a sustainability bond or an MTN programme. However, despite seeing these green shoots of recovery, the markets are still more volatile than before the 2022 mini budget and this is something many are conscious of. Timing is going to be critical.
To help those who are considering an issuance in this calendar year (or beyond) we have summarised the different routes for issuing notes / bonds; what sustainable bonds are; and some tips for preparing for successful issuance.
Which route?
Reference to 'capital markets' encompasses a wide range of possible issuance options. All of the options are methods of raising finance by issuing debt to investors on the capital markets and involve the promise to repay the holder of Bonds/Notes on a specified maturity date. Determining the right route is a key initial question to answer. One way (but not the only way) to determine the right option for issuance is to look at the size of issuance required. If an issuer is looking to raise less than £100 million then a private placement or accessing the capital markets via an aggregator may be the appropriate route (albeit it is possible to raise more than £100 million via either an aggregator or through private placements). However, if an issuer is looking to raise upwards of £150 million then a public bond may be more appropriate (at this size, the costs of issue, which can be higher for a public bond than a private placement, become more justifiable). For a Medium Term Note (MTN) programme (a platform for multiple issues of Notes), these are generally set up for £1 billion and above and, whilst the set up costs are higher again than for a 'standard' bond, an MTN programme provides for speed and flexibility to raise funding when needed.
Along with issuance size, any decision on route to market will also need to take into account matters such as set up / issuance costs, flexibility to raise funding quickly, covenant package and relationship requirements (is it preferred for this to be bi-lateral).
When looking at the difference between an MTN programme and a standard bond, under an MTN programme, issuers can issue multiple series of Notes with a range of coupons (potentially fixed and floating rate) and tenures at different times. With a standard bond issuance, further funding can be raised under a standard bond at future dates (through the sale of retained bonds or tapping the bond); but the maturity date and coupon of the bonds would be the same as for the original issue.
Sustainability, green and social bonds
There are many types of 'sustainable' bonds – sustainability-linked bonds, green bonds, social bonds and sustainability bonds. Amongst RP bond issuances, the majority in recent years have been sustainable bonds.
Green bonds are bond issued in connection with projects that have an environmental benefit, social bonds for activities to deliver social outcomes / benefits and sustainability bonds combine both types of activity. The proceeds of such bonds are applied to finance or refinance new and / or existing eligible green and / or social projects.
Sustainability-linked bonds don't have a use of proceeds restriction but, they are instead designed to incentivise an issuer in terms of setting objectives through KPIs and sustainability performance targets which, if met will have a financial incentive.
Green bond principles, social bond principles and sustainability bond guidelines have been developed by the International Capital Markets Association and, whilst voluntary, they outline best practices when issuing sustainability bonds aiming to promote transparency and disclosure. The principles also contain high level categories for eligible green / social projects.
How to best prepare
One of the most important factors for issuance in the current market will be timing and being ready to take advantage of more favourable market conditions quickly will be critical. Some of the ways we advise RP issuers to prepare are by: getting all documentation ready and having all required board / delegation approvals in place. It is worth thinking about the key aspects of appropriate disclosure, particularly the risk factors and the interplay between these and the information contained in investor presentations. For a debut issuance, consider having ratings for the issuer in place (this can be done well in advance of appointing advisers) and determining the issuing entity (and incorporating the vehicle if this is required) at an early stage. It is possible to set up MTN programmes in advance of a first issuance.
The time taken to secure properties can be lengthy so having properties charged and ready to allocate will also assist with being able to be nimble. Consider carrying out a review of your available stock to allow a more strategic selection of properties most easy to charge.
