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Market Update

Credit rating agencies toughen stance on housing associations

July 10, 2023


Asset improvement programmes and development aspirations at the forefront of rating reviews and more in today's fortnightly.

Indicative pricing

*including on cost

Market update

Sterling bond market

  • Over the past fortnight, we have seen markets trying to adjust to the rate hike, causing short- and medium-term gilt yields to rise, with the long end of the curve coming down around four basis points.
  • This was partly driven by U.K. Manufacturing PMI showing slower contraction than expected and U.K. Services PMI exhibiting continuous growth for five consecutive months at 53.7 — a further sign of inflation persistence.

    Source: Bloomberg

    • Thames Water continues to be a complex and evolving situation. Possible nationalisation of Thames Water has caused further shock in the sterling market, with spreads widening across bonds and a knock-on effect on other water companies.
      • In particular, the Thames Water 4.00% 2025 bond spread widened by 362 bps between 13 June and 30 June.

    Housing association spreads

    Source: Bloomberg, Chatham Financial

    • Housing association (HAs) spreads have widened by two to three basis points over the past fortnight — broadly driven by credit rating concerns in the sector, with concerns around more downgrades on the horizon.
    • HAs continue to face challenging conditions, with pressure on operating surplus and balancing investment in existing stock whilst continuing to develop and provide their communities with new homes.

    Credit ratings

    • HAs are being subjected to increased scrutiny by rating agencies. Overall, the sector has responded by reducing its development pipelines, but the medium-term pressure persists to invest in existing properties and raise them to EPC band C or higher.
    • Investment in existing assets remains a priority for the sector, and Chatham has been working with several clients this year to optimise business plans by balancing the delivery of their asset improvement and development programmes with safeguarding credit rating. Please reach out to the team for ratings advisory support.

    New issues

    • There have been no new housing association issues.

    Private placement opportunities

    • There have been no new housing association private placements (PP) over the last fortnight.
    • Borrowers are still concerned about the absolute cost of debt (6.00%+), with U.K. investors looking for 25–30 bps premium to public debt.
    • This has prompted HAs to look at the aggregator market and bank debt to fulfill their funding requirements.

    Banking market

    • The banking market remains competitive with the sector looking to meet short- to medium-term funding requirements through the banking market. Chatham is seeing greater appetite from lenders to provide revolving credit facilities on an unsecured basis.
    • However, these are inherently more expensive than secured facilities, with a c. 40 bps premium on margins and tenor generally restricted to a maximum of three years.

    Economic news

    • The Halifax House Price Index showed a month-on-month contraction from May to June of 0.10%, with a year-on-year decline of –2.60%.
      • The year-on-year decline is the largest since 2011. This shows some resistance to current economic challenges, although increased rates may squeeze housing affordability further and put increased downward pressure on prices.
    • U.K. Manufacturing PMI in June fell to a six-month low at 46.5. Although output contracted for the fourth month in a row, the pace of contraction was slower — above the preliminary estimate of 46.2 but still lower than May’s 47.1.
      • Weaker demand in both domestic and overseas markets is seen as an underlying factor — together with market uncertainty and overall elevated price levels.
    • U.K. Services PMI sat at 53.7 in June, down from 55.2 in May. While growth in the services sector eased, output rose for the fifth consecutive month this year.

              Source: Bloomberg, S&P Global

              • The slowdown in services was partly contributed to weaker spending in the real estate and construction sector due to rising borrowing costs.
              • Cost pressures eased slightly. However, labour market conditions have remained strong with an increase in salary payments offsetting the falling energy and fuel prices.
              • The services sector is the largest proportion of GDP in the U.K. Hence, the growth may lead to further inflationary pressures.

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              This material has been created by Chatham Financial Europe, Ltd. and is intended for a non-U.S. audience. Chatham Financial Europe, Ltd. is authorised and regulated by the Financial Conduct Authority of the United Kingdom with reference number 197251.