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US PP market flourishes in UK as investors eye councils

A rich variety of UK borrowers including a football club, two airports, the City and a clutch of FTSE 250 firms turned to US private placements in 2019. UK local authorities remained absent, but a surprise from the UK Treasury in October may be a game-changer

Long dominated by industrial companies, the UK’s US PP market is opening up to the wider world. “The volume we’ve seen in the market this year has actually been really, really pleasing,” says Steve Valvona, London-based head of private placements at Lloyds Banking Group, which internally has noted over £10bn-equivalent of UK issuance of US PPs this year. “There’s been a real mix of issuers, with variations of structures and tenors.”

North London football club Tottenham Hotspur took £525m US private placements with 15, 20, 25 and 30 year tenors in late August, to pay off banks loans that funded its new stadium. UK coach operator National Express sold $500m-equivalent seven, 10 and 12 year US private placements in dollars, euros and sterling in October. 

Cadent Gas sold one of the UK utility sector’s largest private placements in March, placing £680m-equivalent of US private placements across several tranches, in dollars and sterling. Bristol and Birmingham airports tapped the market in the second half of the year, and Lloyd’s of London was marketing a debut US private placement as the year drew to a close.

“Once there’s a buzz in the market it’s easier to convince other borrowers to tap it,” says Tony Fordham, head of private placements at Santander in London. “The investor base has demonstrated its ability to be open to new borrowers, and not sentimental — around Brexit among other things — while committing serious credit work to find the right value for the borrower.”

UK borrowers in 2018 accounted for roughly 15%-20% of overall US PP issuance, and market players are confident this year will certainly match that amount, if not top it. “We’re constantly on the hunt for new sectors and growth potential,” says an investor from a UK institution. “First we had education, then housing, and now it seems local authorities are the next big thing.”

Time to strike

UK local authorities have never strayed en masse into capital markets, largely because the Public Work Loans Board (PWLB), a statutory body operating within the United Kingdom Debt Management Office, an Executive Agency of HM Treasury, that offers loans from the National Loans Fund to public bodies, has offered debt at levels both public bond and private debt investors could not compete with. 

This hasn’t prevented the odd rare issuance from a UK local authority.

The City of London Corporation, via its endowment fund The City’s Cash, turned to the US private placement market this year, raising £405m for a number of projects, including the consolidation of its famous wholesale food markets, Billingsgate, Smithfield and Spitalfields, to a new single site in Essex.

“City of London was clearly a special case, and not a straightforward local authority, but it certainly put the sector in focus,” says the UK investor.

At first glance, UK local authorities are a neat fit for the private placement market —  quasi-governmental borrowers with need of long-term debt, often at small sizes hard to find in public markets. 

So neat a fit in fact, that advisers like Rothschild have held preliminary meetings with certain councils and private placement investors to gauge mutual appetite in the past few years. 

Another investor from a UK institution met Birmingham City Council, for example, and said: “It seemed an attractive prospect and it certainly fulfilled our criteria on credit metrics and tenors. But then it came to the price, and we simply couldn’t match the PWLB.”

The PWLB’s lending margins were 80bp over Gilts, and even the keenest institutional investors could only reach roughly 100bp over Gilts. However, this may have just changed, as on October 9 the Treasury announced the PWLB would immediately increase its lending margins to local authorities to 180bp over Gilts — a level well within the reach of institutional investors.

Already there’s been an impact. Redbridge Council, in northeast London and by no means the largest or most lucrative borough, sold £75m of lengthy debt at 126bp over index-linked Gilts in early November. Antoine Pesenti, managing director at advisory firm TradeRisks, that arranged the deal, said: “Our funding solution allowed Redbridge to secure debt which is RPI-linked and has a deferred structure, both features are not available with the PWLB, and at a price significantly cheaper than PWLB.” 

The councils floated by the market so far are mostly in London — Camden, Kensington, and Westminster for example. 

Akshay Shah, managing director at New York Life Investors in London, would like to learn more. “I don’t know what types of structures, covenants or security UK local authorities are interested in,” he says. “It’s not clear how the financing would work but it’s exciting, and we’re all ears.”   GC