Annington putative high-yield deal faces hurdles

Mon Nov 19, 2012 7:17am EST

LONDON, Nov 19 (IFR) - Private equity firm Terra Firma would find it difficult to issue a high-yield bond to finance taking full control of Annington Homes without first obtaining bondholder permission to extend the maturity of its existing Class A bonds, market sources say.

The Telegraph reported late on Friday that Terra Firma had agreed to pay Nomura GBP500m for Annington Homes with a GBP500m high-yield bond that Barclays is organising.

Barclays declined to comment on the report.

Part of the problem with raising a high-yield bond is the current structure of the securitised debt backing Annington, which includes a zero coupon GBP1.48bn Class A maturing in 2022, of which GBP1.43bn remains outstanding after buybacks.

Terra Firma originally bought Annington in 1996 when Guy Hands, the founder of the private equity company, worked at Nomura. Terra Firma has been managing the company for the Japanese bank.

Annington Homes became one of the largest private owners of residential property in the UK when it purchased the Married Quarters Estate from the Ministry of Defence (MoD) in 1996. Annington leases the majority of its properties back to the MoD to provide accommodation for service families.

Fitch put the Triple A rating of the Class A notes on review for downgrade on August 30 because the tail period between the loan and bond maturities is too short and would give an administrator only one year to enforce and sell the properties.

An extension of the final legal maturity would lessen the risk of a fire sale of assets in order to repay bondholders, analysts said.

Fitch is expected to resolve its rating watch by the end of November, but a downgrade would prevent the issuer from adding more debt to the current structure, one analyst said.

"Ultimately, it would be difficult to issue a high-yield bond within the current structure without bondholder approval for a maturity extension," said one market source.

"The current structure also does not allow for dividend payments either, so I cannot see how a high-yield bond could be raised outside the current debt structure as it would effectively have to be a zero coupon high-yield bond," the source said.

Annington also has a GBP964m zero coupon Class B1 note due 2023 and a GBP665m floating rate note maturing in 2023, according to its website.

The total book value of its existing debt is closer to GBP1.7bn, according to credit analysts at RBS, as the value on the zero coupon bonds rise as the bonds near their maturity.