PHP pioneers new financing treatment for property sector

PHP’s £75m retail bond issue highlights new funding source for property, reports Jane Roberts

Primary Health Properties tapped into a new finance source for property companies this month when it raised £75m on the retail bond market.

The seven-year debt is provided directly by yield-hungry retail investors, who can invest as little as £2,000 and will receive a relatively attractive 5.375% coupon. However, in PHP’s case the bond is unsecured, so investors’ risk is ranking behind the REIT’s secured lenders, mainly Aviva, Santander and RBS.

The London Stock Exchange launched the retail bond market in early 2010, as an alternative to bank finance. Bonds are traded on the LSE’s Order Book for Retail Bonds (ORB). There have been over a dozen issues to date; Primary Health Properties’ follows Tesco’s, Lloyds’, National Grid’s and, this month, Severn Trent’s (see table).

PHP is a bit unusual as an issuer in the developing retail bonds market in that it isn’t a household name, says Stuart Bell, manag-ing partner of the issue’s lead manager, Independent Debt Capital Markets.

In its favour, points out PHP managing director Harry Hyman, is that 90% of the £32m of rental income in its 164-property portfolio of surgeries and health centres is reimbursed to GPs’ practices by the government, and a high proportion of its 2,500 shareholders are retail investors.

Leases appeal to investors

“The average unexpired 16-year lease length is extremely attractive to investors,” Hyman says. “We are pretty well-known by private client stockbrokers, as people buy our shares because they like the income.” The yield on the shares is about 5.8%.

For PHP, the debt “falls between secured bank debt and equity. The advantage is we don’t have to provide security.” And for the investors? “The bond coupon is paid ahead of the dividend and people know we exist to pay the dividend, so they will get the money.”

John Edwards, a director of debt adviser JC Rathbone Associates, says: “I’m positive on retail bonds as they open a whole new area of capital markets. They could work for people in property, but it is critical to have a story that retail investors – who may not pay attention to ratings – can understand.”

Bell, who last December advised on healthcare company Assura’s £110m, 10-year secured debenture, paying 4.75%, believes other property companies are likely to follow PHP into the retail bond market, particularly small to medium sized, unrated companies with strong cashflows, as “it is a potentially interesting alternative to other finance”.

Adrian Bell, who worked on several retail bond issues as head of a team at Evolution, which joined Canaccord Genuity last year, agrees. “It’s a great market for enabling mid- cap property companies to replace some of the bank funding being pulled back from them. We are mandated on a secured deal for a property firm in the next couple of months.”


Household names tap a fresh stream of liquidity

UK retail bonds are similar to wholesale bonds, offering five to 15-year debt, with less restrictive covenants than bank debt or US private placements. They are usually London Stock Exchange listed, price transparency being provided by market makers on LSE’s retail bond trading platform, the ORB.

Issue sizes are generally £50m-£150m, with a £10,000 maximum denomination to ensure accessibility to retail investors.

Offshoots of household names have used them as an alternative to corporate bonds the Tesco Bank issue is not guaranteed by the retailer – or by unrated small or medium- sized companies like Provident Financial that cannot use the corporate bond market. Others, like Primary Health Properties and housing association Places for People, have raised unsecured debt this way.

Finance costs range from 5%-plus to 7%. Provident Financial paid 7%, but will charge a lot more for loans to its customers.

Inflation-linked deals have been popular. National Grid’s 10-year, inflation-linked bond attracted £260m and was increased twice to meet demand. There have also been non-tradeable, hold-to-redemption issues, such as a £50m issue last year by John Lewis.