* Company eyeing further real estate opportunities

By Laura Benitez

LONDON, July 7 (IFR) - UK residential property firm Annington Funding replaced its entire capital stack with dramatically cheaper long-term debt in one fell swoop this week, transforming its business by freeing up vital cashflow.

The £3bn-equivalent five-tranche transaction allowed the company, which leases homes to the Ministry of Defence, to slice its eye-watering borrowing costs nearly in half.

" transaction is transformational and puts Annington in a strong position with both cheaper and longer-term debt that sets us up well for the future, said James Hopkins, Annington's CEO.

The proceeds from the new notes, sold off Annington's £2.5bn EMTN programme, will be used to refinance much of its old debt, which includes a string of structured notes and a high-yield-style PIK toggle, issued in 2012 with a whopping 13% coupon.

Annington was created in 1996 to acquire more than 57,400 residential properties from the Ministry of Defence, the majority of which were immediately leased back to the MoD on a 200-year lease.

The company refurbishes and sells or rents on the open market those homes released by the MoD as surplus to its needs.

"When we acquired Annington in 2012, we always knew there was a single issue that would hold the business back – its legacy capital structure," said Andrew Geczy, CEO of private equity company and Annington owner Terra Firma.

"I'm definitely a fan of the new Annington issue," said Gordon Shannon, a portfolio manager at TwentyFour Asset Management.

"Given the volatile political situation and uncertainty around government spending, defence policy and Brexit, the MoD appears to be taking a pretty conservative approach to housing stock releases."

Annington owns almost 40,000 homes, with most still leased to the MoD, making it one of the largest private owners of residential property in England and Wales.

"Effectively, they are turning a fairly complex capital structure into something far simpler," Shannon said.

"The covenants on the new unsecured issuance were very strong, so revenues allocated to bondholders remain predictable. You are buying UK government-backed income streams, with upside potential if we see an acceleration of old MoD housing stock disposal again."

Geczy told IFR that the latest transaction would afford Annington the possibility of cashing in on lucrative UK real estate opportunities.

"This deal will allow Annington to incrementally expand its activities in the private rental sector and it will be key to the company finding opportunities around the UK," he said.

"It will allow the firm to make the right kind of deals, and free up cashflow, which will be key for the firm to expand in the UK real estate market."

TAKING ACTION

After wrapping up its roadshow on Tuesday, Annington came to the market the following day with a £625m eight-year tranche, a £600m 12-year, a £625m 17-year and a £625m 30-year.

The issuer locked in coupons of 2.646%, 3.184%, 3.685% and 3.935%, respectively.

It also offered a €500m seven-year piece at 1.65%.

"It was one of the most complex deals that we have worked on, given the company's complicated capital structure," said Marco Baldini, head of European bond syndicate at Barclays.

"We had been working on the deal since the beginning of this year, and the timing of the deal was dependent on all the different workstreams like the LM being completed, but we knew it was coming and were on standby."

Annington launched a liability management exercise for four of its structured notes at the end of June, which totalled over £2.9bn.

The sterling portion of the bond became the second biggest corporate sterling bond of all time at £2.475bn. Last year, National Grid Gas Finance sold a £3bn five-trancher.

"We wanted to make sure that the deal made sense for the market, and that there was sufficient liquidity in the market for the size and structure which we wanted to do," Geczy said.

"We were also very keen to get the deal done ahead of the summer, as we didn't want to risk being hit by potential interest rate increases further into the year."

Annington (NR/BBB/BBB) wrapped up its European roadshow on Tuesday via bookrunners Barclays and JP Morgan.

Adding to this week's corporate sterling supply was Volkswagen Financial Services.

The borrower sold a £300m long five-year bond at 115bp over Gilts on Wednesday, on orders of £320m.

Volkswagen, rated A2/BBB+ by Moody's/S&P (expected), mandated RBC CM and Santander as joint bookrunners. (Reporting by Laura Benitez, editing by Philip Wright and Sudip Roy)