Insight into funding opportunities and anticipated market trends for housing associations

Indicative pricing

Market update

The sterling bond market

• Last week saw a sharp surge in gilt rates, causing the 30-year maturity to exceed the 4% mark for the first time since the onset of the banking crisis in Europe and the U.S.
• The Debt Management Office (DMO) issued 3.25% January 2033 gilts.
  • The popularity of the 10-year issue received £9.87B in bids, and issued £3.25B, resulting in a bid-to-cover ratio of 3.04x.
• The DMO is expected to undertake two further syndicated gilt sales in April and May.
  • The April issue, an index-linked gilt with a March 2045 maturity, is scheduled for the week commencing April 24, 2023.
  • The May issue, a traditional gilt maturing in October 2063, is scheduled to take place the week commencing May 15, 2023.

Housing association spreads

• There continues to be a strong market for investment grade corporate bonds.
• Most are yielding between 5.0-5.5% with yields remaining relatively steady, despite increases in gilt yields in the past month.
• This reflects a shortage of supply with many borrowers waiting for yields to fall below 5% before taking on more fixed-rate debt.
• This has forced investors to hunt for opportunities in the secondary market as they remain underweight investment grade bonds, leading to significant tightening of housing association (HA) spreads.
• Stronger credit ratings continue to outperform lower-rated A-/A3 borrowers.

New issues

• There have been no new HA issues in the past fortnight.
• Supply from the utilities sector has also slowed.
• As a result of the excess demand, higher risk BBB rated entities such as Centre Parcs and ICAP benefitted from lower New Issue Premia (NIP) and heavy oversubscription.

Private placement opportunities

• As mentioned in our most recent private placement (PP) market update, investors continue to be under-lent and long cash.
• As a result, both U.K. and U.S. investors have adopted a more flexible approach to terms, particularly in terms of pricing and maturities.
• Although debt terms of seven years or longer are preferred, each issue may include multiple tranches with varying drawdowns and maturities.
• Furthermore, there is the potential for greater covenant flexibility in comparison to the banking market, with no limit on facility size.

Banking market

• Chatham is seeing more lenders offering green term loan structures to the HA market.
  • Tenors are expected to match future commitments on EPC and retrofit spend, in the 10-15-year range.
  • This may offer pricing benefits versus traditional products for some borrowers.
• Due to rising costs associated with building fire safety and decarbonisation, many HAs are attempting to move away from restrictive EBITDA-MRI covenants.
  • However, this has not come soon enough for some borrowers.
  • High inflation, rent caps, and repairs commitments have driven an increasing number of HAs to require waivers from their banking lenders over the last year and increased pressure on the banks to amend covenants before FY 2024 year-end.

Economic news

• March’s CPI numbers came in at 10.1% YoY vs. 9.8% consensus, resuming a downward trajectory after an unexpected rise to 10.4% in February.
• The Bank of England's likelihood of raising its base interest rate jumped with the news.
  • Markets are now pricing in a 97% chance of an increase to 4.5% on 11 May and indicating it could reach 5% by the autumn.
• The CPI figures raises doubts about the accuracy of the BoE's prediction of a sharp decline in inflation for the rest of 2023.
• The U.K.'s monthly GDP figures showed flat growth from January to February, falling short of the 0.1% increase predicted.
  • It was brought on by a decline in services and production, which was offset by an increase in construction.
• The Office for National Statistics revised the January GDP figures from 0.3% to 0.4%.
  • Monthly GDP is now estimated to be 0.3% above its pre-COVID levels in February 2020.
• On the surface, U.S. economic data appeared to be positive, as the month-on-month CPI for March came in at 0.1%, lower than the 0.2% consensus.
  • Year-on-year CPI was also lower than expected, coming in at 5.0% instead of 5.2%.
• However, core CPI increased by 0.4%, which may prompt the Federal Reserve to raise the target rate at their May meeting.