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CORRECTED-REFILE-Terra Firma's PIK and Mix proves a sell-out
November 23, 2012 / 4:00 PM / in 5 years

CORRECTED-REFILE-Terra Firma's PIK and Mix proves a sell-out

(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 from.

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 securitisation structures.

The structure of the RegS/144A 10-year, non-call five PIK, therefore closely mimics the junior tranche in a securitisation waterfall.

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.”


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.


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 subsidised housing.” (Reporting by Natalie Harrison and Owen Sanderson, IFR Markets; Editing by Alex Chambers)

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