Medium Term Note programme vs. stand-alone bond issue
Should a housing association set up a Medium Term Note programme rather than issuing a stand-alone bond?
With LiveWest becoming the latest housing association to launch a Medium Term Note programme (MTN) programme, a number of finance teams have been asking whether their next issue should be through an MTN programme. To assess the best option for your organisation, it is important to understand the key costs and benefits between establishing an MTN programme and issuing a stand-alone bond.
How does an MTN programme differ to a standalone bond?
Both are methods of raising finance by issuing debt to investors on the capital markets and involve the promise to repay the holder of Bonds/Notes on a specified maturity date. Notes issued under an MTN programme or bonds can both either have an interest rate payable during the issued life of the Notes/ Bond (known as the coupon) or can be issued with no coupon, but discounted in value on issue (the former being the much-preferred type in the sector).
An MTN programme is essentially a platform for multiple issues of Notes. The instruments issued are called Notes rather than Bonds, but the name difference has little consequence in practice. Under an MTN programme, issuers can issue multiple series of Notes with a range of coupons (potentially fixed and floating rate) and tenures at different times. With a standard bond issuance (of the size usually seen issued in the affordable housing sector), bonds are issued with a set coupon and tenure. Further funding can be raised under a standard bond at future dates (through either the sale of retained bonds or tapping the bond); in each case, the maturity date and coupon of the bonds would be the same as for the original issue.
Assessing the costs and benefits
An issuer can of course create a new series of bonds with a different coupon and tenure when it requires a new line of funding. The important question for housing associations is whether they have the need to issue frequently enough and does the cost and management time saved in having the ready to go MTN programme for new issues outweigh the additional upfront work and cost in putting in place an MTN programme, and undertaking the yearly update that MTN programmes require if an issuer wishes to continue to utilise it?
Putting an MTN programme in place is more expensive than a stand-alone bond, but once a MTN programme is established, each issue does not as a matter of course require the publication of new admission documents or agreement of the various structural documents required for a bond (which are put in place on establishment of the programme). The commercial terms of each issue are dealt with by way of a pricing supplement, a relatively simple, pre-agreed form document setting out the pricing terms, and, usually, a subscription agreement. This saves costs and management time on subsequent issues and allows for issues at relatively short notice.
There are potential pricing advantages for a housing association that is able to issue at short notice, but the critical time path on most issues in the sector is the security charging – having a ready to charge pool of property, possibly as part of a rolling charge programme will be an essential accessory to a MTN programme. Early MTN programmes avoided charging causing delay by being unsecured, but issuers would have to consider the pricing consequences from offering unsecured notes.
There are housing associations that will benefit from establishing an MTN programme but for others the figures will not stack up. The smallest of current housing assocation MTN programmes allow for total aggregate issuances of up to £1billion, this gives an indication of the level, to date, where RPs have decided that the benefits outweigh the cost. This is an “up to” figure and any cost / benefit analysis was most likely not performed on this maximum amount, but this gives a rough indication as to whom it may benefit to look at the figures more closely.