February 2011

EMTN Programmes and Private PlacementsChris Jones, Places for PeopleChris Lipscomb, Morgan StanleyPeter Matza, The Association of Corporate Treasurers

EMTN Programmes: Setting Up and IssuingSection 1

What is an EMTN Programme?EMTN programmes: setting up and issuing

What does “EMTN” stand for?

• “EMTN” stands for European Medium Term Note• Most bonds issued in the UK and Europe are European Medium Term Notes• EMTNs are typically suitable for sale to European, Middle Eastern and Asian investors

What is a programme? • A programme is a documentation framework which enables the issuer to issue European Medium Term Notes in a timely manner

How does it work? • Assuming an up-to-date programme, an issuer may drawdown on the programme (i.e.

What currencies? • Almost any currency

• The costs of the programme are similar to the costs for a one-off issue• The costs of a drawdown are very limited once the programme is in place

What are the costs?

What maturities? • Almost any maturity

How does it work? • Assuming an up-to-date programme, an issuer may drawdown on the programme (i.e. issue bonds) at short notice (e.g. 48 hours) using the Final Terms outlined in the programme

• Investors buy the bonds as they would a standalone issue, and the bonds may be public or private

• Once established, the programme is updated on an annual basis

Establishing the ProgrammeEMTN programmes: setting up and issuing

Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7

•Appoint parties (arrangers,

•Counsel and Issuer to prepare business disclosure

•First drafts of Programme Legal documents circulated•First draft of

•Conditions Precedent docs distributed•Due diligence questions

•Due diligence call•Base prospectus signed off•Opinions and

•Issuer’s board to approve base prospectus

•Appoint parties (arrangers, counsel, dealers, paying agent)

•Auditors to begin comfort letter

•Counsel to begin drafting documents

•First draft of Auditors Comfort Letter distributed•First draft of base prospectus circulated•Due diligence questions and mandate letter distributed

questions agreed, mandate letter executed

•Opinions and comfort letter delivered•Documents signed

Drawing Down ProcessEMTN programmes: setting up and issuing

Day 1 Day 2 Day 3 Day 4(Pricing)

Day 10(Signing)

Day 11(Closing)

•Roadshow (if required), and announce intention to issue to market

•Prepare any prospectus supplements (e.g. “Recent Developments”)

•AMAnnounce formal price talk to market, and open book

•Pre-signing due diligence call

•CP documents in agreed form (legal opinions,

•Pre-closing due diligence call

•Delivery of CP documents

•Pre-pricing due diligence call •PMBooks closed, transaction priced

(legal opinions, comfort letter, closing certificates)

•Sign Final Terms and Subscription Agreement

•Funds settle

Advantages of an EMTN ProgrammeEMTN programmes: setting up and issuing

Diversification of Funding Sources

• Broad investor base access in Europe, the Middle East and Asia

Financing Flexibility • Maximum issuance flexibility with respect to issue size, structure, maturity, currency and market

Time and Cost Savings • Pre-established documentation reduces management time and legal fees

Enhanced Opportunities

• Ability to issue both strategic public bonds and opportunistic private placements • Opportunities to lower average cost of funding through structured transactions• Immediate access to time sensitive market windows and arbitrage driven

opportunities

currency and market• Instruments can be vanilla bonds, hybrid instruments, private placements, etc.• Direct access to multi-currency financing

• Establishment of a global presence in the capital markets through a global funding profile

• Regular dialogue with MTN traders gives valuable “global reconnaissance”

Capital Markets Presence

Secured vs. UnsecuredSection 2

300

350

Trading Performance of Tesco property Finance TransactionsSpread measured against Government benchmark GiltBasis Points

Tesco: a Premium for Security?Secured vs. Unsecured

G+330 bps

100

150

200

250

Jun-09 Aug-09 Oct-09 Dec-09 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11

TESCO 6.05% 2039 TESCO 5.74% 2040 TESCO 7.62% 2039 TESCO 5.00% 2023Secured Bonds Unsecured

160 bps

70 bps

45 bps 20 bps

G+220 bps

G+165 bps

Source Morgan Stanley, Markit1

How Important Is Security To Investors?Secured vs. Unsecured

Spread to benchmark (bps) Index

600

700

610

630

650

Trading Performance of Housing Association bonds vs UK real estate spreads

0

100

200

300

400

500

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11490

510

530

550

570

590

610

PfP 20s PfP 43s UK Real Estate (1) UK Housebuilding Starts

Notes1. UIRE Index from Merrill Lynch Credit Indices

Source Bloomberg, Morgan Stanley

Security: a Rating Agency ViewSecured vs. Unsecured

• Rating agencies typically classify housing associations as government related entities – i.e. entities which would likely receive extraordinary government support if required to meet financial obligations

• Consequently, ratings for housing associations tend to be in the A to AA category, irrespective of security irrespective of security

• S&P notes that while a secured bond, with high prospects for recovery in the event of default, can be rated higher than an issuer credit rating, this is not the case if the issuer credit rating is ‘AA-’ or above

An Issuer’s PerspectiveSection 3

Business DescriptionBusiness Description

• One of the largest property management, development and regeneration companies in UK

• Exists to improve current neighbourhoods and build new ones

• Group has a portfolio of companies that own and operate assets to provide:

– Social housing– Social housing

– Market rent

– Development for sale

– Land and infrastructure investment

– Financial services

– Charities

• All with their own funding demands!

Places for People PortfolioBusiness Description

Places for People StatisticsBusiness Description

• Over 62,278 homes owned and managed

• 2010 turnover £312m

• Fixed assets £3.1bn

• Debt £1.61bn

• Grant £1.3bn

Treasury ManagementBusiness Description

• Very strong banking and UK, US & Japanese investor relations

• Minimum 12 month cashflow backed by undrawn, committed bank credit facilities

• £232m available funding

• 75% of debt fixed or hedged

• Interest Cover 1.3x (after dep’n)

• Gearing 51%

• Credit ratings:

– Places for People rated A+ with Standard & Poors

– Places for People Homes rated Aa3 with Moody’s

– Stable outlook

Capital StructureBusiness Description

• Funding mix:

– Gross debt of £1.61bn as at 31 March 2010

– Sterling bonds outstanding £585m

– US private placements $200m (£131m)

– JPY EMTN placement JPY 10bn (£76m)

– Bank and other debt £818m (mainly arranged on an RCF and bilateral basis)

– Average maturity target of debt is 15 years

Approach to FundingApproach to Funding

• Complex business structure requires support from a robust but flexible funding model

• Which must evolve as the business grows and the operating environment changes:

– Falling grant levels

– Challenging credit markets

– Slow recovery of housing market

– Housing benefit levels???

• Investors are key to our future stability and growth

Approach to Funding (cont’d)Approach to Funding

• Different types of investment have their own funding needs and structure

• Development programme balance towards more ‘for sale’ and flexible tenure together with investment in land and infrastructure

• Cashflow & matching assets with liabilities

• Group treasury management with inter-company loans

• So, from where do we source our funding?

Our Funding ModelApproach to Funding

• Short term debt – the bank sector

• Medium term debt – private placements & capital mkts

• Long term debt – the capital markets• Long term debt – the capital markets

• Our target is to move over time to 50-60% unsecured funding

• Liquidity and funding flexibility and then, pricing

• Diverse investor base – a key priority!

Our Funding Model (cont’d)Approach to Funding

Bank RCFs EMTNs & Private Placements Bonds

Up to 5 Years Up to 15 Years 20+ years

SECUREDUNSECURED

Refinanced by:

Approach to FundingBank Debt

• 364 day to 5 year revolving credit facilities

• A mix of secured and unsecured (but restructure to fully unsecured over time)unsecured over time)

• 1st call on surplus cash to repay debt

• Used to fund short to medium term cashflow

Capital MarketsCapital Markets

• Private Placements

• Medium Term Note Programme

• Bond issues

Private PlacementsCapital Markets

• Smaller volumes

• Single investor or a small ‘club’

• US market very large and well developed

• Well suited to medium term funding• Well suited to medium term funding

• Competitive pricing

• Credit ratings not essential but helpful

• Cross currency swap – can add to all in pricing

• Unsecured funding a possibility

• Again, investor relations

Medium Term Note ProgrammeCapital Markets

• 5, 7 and 10 year tenors

• £650m unsecured programme rated Aa3

• Flexible funding with floating and fixed rates• Flexible funding with floating and fixed rates

• Attractive covenant structure

• Sterling, Euro and Dollar denominated

• Ready to go when the time is right!

EMTN CovenantCapital Markets

• Net available properties value (NAPV) not less than 1.1 times total unsecured debt

• NAPV calculated as:

Total properties value (inc FAI, Stock & WIP) £2.9m

Less: Total secured debt £1.4mPublic sector grant £0.9m

NAPV £0.6mUnsecured debt £0.3m

i.e. 2x cover

Bond IssuesCapital Markets

• £585 million of capital market debt

• 4 ‘own name’ issues

• 25 to 30 year tenors• 25 to 30 year tenors

• Structured around net cashflow of pooled assets and ability to service the bond

• No corporate covenants

• Private placements on 5, 7 and 10 year tenors

Bond Issues – ApproachCapital Markets

• Clear strategy

• Key people and resources

• Timing a key factor

• Credit rating considerations• Credit rating considerations

• Investor relations – road shows and credit analysis (incl. regular updates)

• Size and structure

• Costs

• Future considerations – servicing and management

Bond Issues – AdvantagesCapital Markets

• Large volumes – typical issue size £100m +

• Smaller sizes facilitated through conduits, e.g., THFC

• Long term fixed rate money – banks tending to lend short to • Long term fixed rate money – banks tending to lend short to medium term with options for longer dated money

• Competitive pricing – currently 1.00% over gilts!

• Generous security and covenants

• Low on-going management

Bond Issues – DisadvantagesCapital Markets

• It is there for the duration of term

• Expensive to refinance

• Credit ratings are a pre-requisite• Credit ratings are a pre-requisite

• Structure can be complex and security intensive and substitution may be more tricky

Investor RelationsCapital Markets

• Investor relations is a key treasury priority

• Proactive dialogue with investors (& CR agencies)

• Annual Investor Seminar• Annual Investor Seminar

• Investor section on website includes video of AIS for overseas investors, etc.

Secured vs. UnsecuredSecured vs. Unsecured

• Negligible effect on credit ratings – emphasis on underlying cashflows and government support

• PfP unsecured EMTN programme rated Aa3 – same rating as the issuer

• Investors protected by the strength of the balance sheet and conservative gearing and therefore, no real value in carving out assetsand therefore, no real value in carving out assets

• Non default sector – insolvency work out would be to transfer assets (and debt) to another RP

• Spreads to secured debt are relatively small (25 bps) – offset by costs of implementing security arrangements and ongoing portfolio management and substitution.

• Therefore, who benefits from the massive ‘industry’ created by security portfolio placement?

SummarySecured vs. Unsecured

• Keep your funding model flexible

• Build and maintain strong investor relations

• Develop and maintain a diverse debt portfolio

• Preparation is key to success

Flexible Funding StrategiesSection 4

Flexible funding strategies

30 year Gilts yields and PWLB spreads%

5.0

5.5

Why Diversify From GBP?

3.0

3.5

4.0

4.5

2006 2007 2008 2009 2010 2011

30y Gilt PWLB spread

Source PWLB, Bloomberg

Flexible funding strategies

8,000

10,000

Sources of Local Authority Long-Term Borrowing for Capex (2004/5 – 2008/9)£ Bn

Local Authorities Looking to Bond Markets

(2,000)

0

2,000

4,000

6,000

Negotiable Bonds Other Listed Securities PWLB Banks Building SocietiesOther Financial Intermediaries Rest of the World

Source New Local Government Network (NLGN)

Cross Currency Swap: An ExampleFlexible funding strategies

Step 1: Housing Association issues a JPY bond

Housing Association

AsianInvestor

¥ Fixed Coupon plus¥ Final Principal

¥ Initial Principal

Cross Currency Swap: An ExampleFlexible funding strategies

Step 2: JPY Principal exchanged for GBP at today’s FX rate

£ Initial Principal

¥ Initial Principal

Swap Counterparty

Housing Association

AsianInvestor

¥ Fixed Coupon plus¥ Final Principal

¥ Initial Principal

Cross Currency Swap: An ExampleFlexible funding strategies

£ Initial Principal

Step 3: JPY coupons and principal repayment exchanged for GBP coupons

and principal repayment at today’s FX rate

£ Fixed Coupon plus£ Final Principal

¥ Fixed Coupon plus¥ Final Principal

¥ Initial Principal

£/¥ Cross Currency Swap Swap Counterparty

Housing Association

AsianInvestor

¥ Fixed Coupon plus¥ Final Principal

¥ Initial Principal

Cross Currency Swap: An ExampleFlexible funding strategies

Net Cashflows: No FX Risk

HA receives GBP at inception

HA pays GBP interest and original principal back at maturity

£ Initial Principal

£ Fixed Coupon plus£ Final Principal

Swap Counterparty

Housing Association

AsianInvestor

Flexible funding strategies

Housing Association Issues BondHousing Association incurs cost of carry on invested cash

Managing Negative Carry from Bond Issues

Fixed CouponBond

Investors

Cash

Deposit HousingAssociation

Cash

LIBOR

Flexible funding strategies

5

6

Fixed rate fixings in a step-up swap

Fixing Coupons Along the Forwards

0

1

2

3

4

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

2037

2038

2039

2040

3 month forward liborSource Morgan Stanley

Flexible funding strategies

Step 1: Swap new fixed rate bond to floating

Step Up Swap-to-Fixed

Fixed CouponBond

InvestorsDeposit HousingAssociation

LIBOR

Fixed

CashCash

Bank

Fixed

CouponLIBOR

Flexible funding strategies

Step 2: Swap existing floating debt to step-up fixed to preserve fixed/float mix

Fixed CouponBond

InvestorsDeposit HousingAssociation

LIBOR

Fixed

CashCash

Step Up Swap-to-Fixed

Swap counterparty

Fixed

CouponLIBOR

LIBOR

Bank lenderHousingAssociation

Swap counterparty

LIBOR

Fixed rate, stepping up with the forwards

February 2011

EMTN Programmes and Private PlacementsChris Jones, Places for PeopleChris Lipscomb, Morgan StanleyPeter Matza, The Association of Corporate Treasurers