Housing associations leveraging opportunistic funding to meet funding requirements

Indicative pricing

Market Update

The sterling bond market

• After initially rallying following the 25 basis points rise from the Bank of England, the gilt market gave back most of its gains on Friday.
• Yields ended the week broadly unchanged at the short-end of the market (out to five years), but 10 basis points higher for longer maturities. The peak in yield curve is now 4.22% at 30 years, in line with February levels. We have seen the long gilt range trade between 4-4.25% since mid-April with some resistance around the 4.25% level.

Housing association spreads

• Housing association (HA) spreads have tightened slightly over the week. The tightest credits are now trading below 95 bps and wider credits at c. 130 bps.
• This suggests a strong bid for sector credits in the secondary market given lack of primary supply.

New issues

• Places for People (PfP) made use of their EMTN programme to issue a total of £146M of unsecured debt in three listed private placements – two sterling and one euro.
• These were for seven years (€25M), 10 years (£50M), and 32 years (£75M) and were priced at spreads of 134 bps, 183 bps and 173 bps respectively.
• It illustrates the benefit of having an EMTN programme in place, allowing for greater speed and flexibility to raise funding when needed, and opportunistically tapping into pockets of investor demand – for example on reverse enquiry. In PfP’s case, they utilized the multicurrency flexibility in their programme to issue in the Euro market as well as domestic.
• We are yet to see a new own-name wholesale public bond issuance (>£250M) from a housing association this year.

Private placement opportunities

• Private placement (PP) investors are still short on stock and prepared to lend more.
• Some are looking to top up on existing transactions with known credits. This may present opportunities for HAs who maintain an open dialogue with their private investors.

Banking market

• Paul Tucker, former Bank of England Deputy Governor, has called for a radical overhaul of banks' funding models to prepare them for a 100% deposit run. Tucker suggests lenders should be required to hold enough collateral to cover short-term deposits in the form of high-quality government bonds or other assets that central banks could value daily.
• If enacted, the proposal could help banks withstand faster bank runs and prevent them from relying on assets tied to their banking businesses to finance other activities. However, we would expect to see significant impacts on the gilt market as well as banks’ abilities to lend given increased costs.
• Recent results from U.K. lenders have been positive, with Lloyds Banking Group being the latest to report strong figures for the first quarter. The broader trend has been one of improved net income margins as rates increase, lower than expected impairments, and continued strength in mortgage and commercial lending despite the higher-rates environment.

Economic news

• The Bank of England (BoE) increased its base rate by 25 basis points to 4.50% in line with market consensus. The vote was a 7-2 split, with Dhingra and Tenreyro voting to maintain at 4.25%.
• The BoE has revised their inflation forecast and now expect the decline of CPI to its 2.00% target to take three quarters longer than its February forecast, resulting in CPI reaching the 2.00% target by Q1 2025.
• This is reflected in their median projection, which skews materially towards the upper bound of the forecast, confirming the uncertainty of its expected downward trend and its persistence.
• Markets are pricing in a peak base rate at 4.80% by September 2023, and for it to sit at relatively elevated levels for a longer period.
• The European Central Bank (ECB) increased its refinance rate by 25 basis points to 3.75% on the 10th May. It is expected that further rate rises will take place this year, peaking at 4.00% in Q3 2023.
• The Federal Reserve was the first to tighten its monetary policy this month, with a 25 basis points increase in its target rate. The upper bound now sits at 5.25%, with the market not anticipating any further rate hikes. Rather it is expected that if inflation figures continue its current path, that the target rate may fall within this year.