Social housing proves palatable in NHFIC’s inaugural deal

Australia welcomed its newest high-grade borrower and first programmatic social-bond issuer on 21 March, when National Housing Finance and Investment Corporation (NHFIC) priced its debut transaction. Leads say attractive credit fundamentals led to a well oversubscribed transaction supplemented by incremental demand from the social aspect.

NHFIC’s A$315 million (US$222.9 million), 10-year deal – led by ANZ and UBS – is the issuer’s first transaction since its inception following the 2017/18 Australian federal budget. The organisation’s purpose is to facilitate investment in social and affordable housing by providing loans to community housing providers (CHPs).

In the KangaNews Australasian High-Grade Yearbook, NHFIC’s Sydney-based chief executive, Nathan Dal Bon, said the issuer would be using a matched-funding model to determine its funding requirements. Specifically, CHP loans with sufficient volume to support bond issuance are pooled and the funds raised from the bond issuance directly on-lent.

NHFIC enjoys an explicit guarantee from the Australian government, paralleled only by Export Finance and Insurance Company in the Australian bond-issuance universe. NHFIC bonds are also high-quality liquid assets and are repo eligible.

The issuer has had its debt programme accredited for social-bond issuance, a decision it says was intended to make NHFIC bonds as attractive as possible to the broadest possible range of investors.

Debut attraction

Dal Bon tells KangaNews that this approach drew positive feedback during the roadshow and was reflected in investor participation. “We are looking to build a new asset class in the Australian debt capital market with bonds backed by social housing. It was very encouraging to see a diverse group of investors take an interest in the inaugural deal.”

The deal attracted strong support from domestic and offshore accounts, lead managers say. Darren Sloane, director, DCM and syndicate at ANZ in Sydney, tells KangaNews that the final book was A$1.3 billion at the final price of 48 basis points over the 10-year Australian Commonwealth government bond futures contract. This margin was 2 basis points tighter than the bottom end of the indicative margin at launch.

Having launched with indicative volume of A$250-300 million, the deal was upsized modestly to A$315 million on the back of significant demand. Tim Galt, executive director and head of DCM syndicate, APAC at UBS in Hong Kong, adds that the extent of the oversubscription sends a positive message on NHFIC’s future transactions.

He tells KangaNews that the converstion rate of investors participating versus those attending the issuer’s roadshow and engaged with advance marketing was very high, which he attributes to the strength of NHFIC’s credit fundamentals.

With the transaction so heavily oversubscribed, Dal Bon says the challenge in upsizing the deal will be ensuring that there is demand from CHPs to fill orders. Under its matched funding model, NHFIC has very limited potential to upsize its bond issuance. However, Dal Bon says NHFIC intends to issue on a regular basis to help meet strong investor demand.

The sharp pricing achieved means he is confident that this can not only be delivered but that those CHPs which may have been waiting to see initial results will now be encouraged to seek NHFIC finance.

Sloane says the number and diversity of investors in the book was especially encouraging. Deal statistics indicate that the majority of the transaction was allocated to domestic investors (see chart 1), while asset managers were the predominant participants by investor type (see chart 2).

Source: ANZ 26 March 2019

Source: ANZ 26 March 2019

Galt adds that while the deal was domestically driven, a number of buyers in Asia have natural demand and mandates for environmental, social and governance (ESG)-themed products and this played out in the NHFIC book.

David Crawford, chief of staff at NHFIC in Sydney, says the roadshow for the inaugural transaction focused on Australia, with offshore investors being offered a conference call. Even so, he says several offshore investors participated and the issuer is confident of being able to grow this investor base in future transactions.

Social-bond demand

Social bonds are a much more nascent asset class than green bonds, and only two other issuers – International Finance Corporation (IFC) and National Australia Bank – have lines outstanding in Australia.

When IFC first came to the market with a Kangaroo social bond, execution of the transaction faced challenges around investor understanding and comfort with the use of proceeds. The level of demand reflected a much greater level of understanding when IFC tapped the same line early this year.

Crawford says that NHFIC’s transaction gave ESG-focused investors a point of distinction given the relative lack of social-bond supply in Australia. “There was genuine interest in the social housing element of NHFIC’s work throughout the deal process. Investors were keen to know who exactly NHFIC lends to and what the overall goals of the programme are.”

Deal statistics show that 60 per cent of the deal was allocated to investors classified as either dark or light green (see chart 3).

Crawford says all of NHFIC’s future transactions will feature a social theme, given all the issuer’s operations are focused on achieving social housing outcomes. He adds that there is the potential to include bonds with focuses on energy efficiency and disability housing in the future, but these will still be included in the social-bond framework.

Source: ANZ 26 March 2019