(Corrects to change new equity total in 2nd paragraph to
GBP450m from GBP950m)
* Annington GBP550m PIK smashes records
* Incentive to repay debt soothes investor concerns
By Natalie Harrison and Owen Sanderson
LONDON, Nov 23 (IFR) - Annington Homes broke new ground this
week with a Payment-In-Kind (PIK) bond, as strict rules on
payouts to private equity owner Terra Firma attracted stellar
demand for an instrument that many investors usually shy away
Guy Hands' Terra Firma buyout group agreed this week to buy
Annington from Nomura in a deal worth GBP3.2bn. It financed the
deal with GBP450m of new equity along with the PIK that sits
outside the existing GBP2.2bn securitisation, which would have
been expensive to restructure.
The sheer size of the Caa1/CCC+ PIK, initially announced as
a GBP500m deal on Tuesday and later upsized to GBP550m,
immediately shocked market participants because of the risky
nature of the deeply subordinated instruments.
However, a "cash-sweep" feature, which restricts payments to
equity investors until cash interest and principal on the PIK
are paid, means that bondholders were offered more protection
than is usual with standard PIKs.
Cashflows from the business will go to bondholders before
Terra Firma - though after the Annington Finance 1 and 4
The structure of the RegS/144A 10-year, non-call five PIK,
therefore closely mimics the junior tranche in a securitisation
The majority of investors in the bond, which sole M&A
advisor and bond bookrunner Barclays began marketing back in
June, were specialist property funds, while existing investors
in the junior tranche of the securitisation also participated.
Some more traditional high-yield accounts with internal ABS
expertise also bought the deal.
Investors did well from the trade in the immediate
aftermarket. The bond priced, at par, to yield 13% and was bid
at 105 by Friday, according to one.
One high-yield investor said the rationale for the PIK made
the deal attractive.
"The sponsor acquired a debt structure where it is only able
to take cash outside under certain conditions, but it has
acquired the business because it sees equity value in the
housing stock," added the investor.
"That is comforting for an investor, unlike in a usual PIK
where the equity sponsor is using the proceeds to take money out
of the business."
A RECORD-BREAKING "SAFE" PIK
Annington is the largest PIK of the year on a global basis,
surpassing a swathe launched in the red-hot U.S. market, and the
biggest PIK in Europe on record. It is also the largest debut
sterling high-yield bond, and the largest sterling-denominated
Triple C bond.
Its five-point jump in secondary was in sharp contrast to
the 12.4% EUR250m PIK issued by Swedish cable company Com Hem
last week which is trading 3.5 points below its launch price.
The investor said there appeared to be a lot of liquidity,
with other banks away from the deal also making markets.
High-yield investors compared the Annington PIK to the B
notes in HoldCo structures issued by utilities such as Anglian
Water or those issued by UK airports operator BAA.
Terra Firma's equity cushion, reduced slightly after the
bond was upsized, was also another selling point for investors.
"At 13%, this is an expensive piece of debt. So Terra Firma
has a strong incentive to redeem this paper before it starts
eating into its equity returns," added the investor.
He compared the PIK to a EUR600m security issued by lead
producer Eco-Bat in 2007, which has since grown to over EUR1bn
and has sunk to around 45 cents on concerns about whether the
debt will be repaid by majority shareholder EB Holdings II.
The proceeds from a EUR300m 7.75% high-yield bond issued by
Eco-Bat in March 2017 was used to repay a revolver, and a
GBP290m dividend. Investors have been hoping that the
shareholders would use some of those proceeds to repay the PIK,
but so far that has not materialised.
MARRIED TO THE MOD
Investors also like the Annington business. 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).
The company leases the majority of its 40,000 properties
back to the MoD to provide accommodation for service families.
That leasing contract, which has around 180 years to run, is
effectively an arrangement with the UK government.
Hands' knowledge of the business is also a major positive.
He was behind Nomura's purchase of Annington in 1996 when he
worked at the Japanese bank, and he has managed the investment
on behalf of Nomura for the last 15 years.
Cashflows to the Annington Finance securitisations - and,
eventually, to the PIK note - will come from properties that the
MoD designates as surplus. Annington will sell these at market
value and use the proceeds to pay down the debt.
"Even if you assume that property prices do not rise over
the next few years, Terra Firma would only have to sell about
25% of properties to repay the PIK," said another high-yield
investor, adding that the pricing was extremely attractive
compared to junior ABS tranches at around 400bp over mid-swaps.
"Given the cutbacks in government spending, we can also
assume that properties will be sold. Fewer soldiers means less
(Reporting by Natalie Harrison and Owen Sanderson, IFR Markets;
Editing by Alex Chambers)