Housing association issuance opened by first benchmark issue of 2023

Indicative pricing

Market update

Sterling bond market

• Higher than expected inflation figures prompted the BoE to raise the base rate by 50 basis points. The MPC voted 7-2 for the hike. The market had priced in a c. 50/50 chance of 25 bps or 50 bps in advance of the meeting. Choosing the larger amount is a clear signal to the market.
• Earlier in the week, the higher core CPI print led to a sell-off in the gilt market, driving yields up across the curve by six to 10 bps.
• This hike from the BoE has put further pressure on the short end of the gilt market, leaving one-year rates up 20 bps between Monday and Thursday.
• The net effect has flattened as short- and medium-term gilt yields rose, and long dates remained anchored below 4.50%.

Housing association spreads

• Housing associations (HAs) have tightened by four-to-five bps since mid-May.
• Spreads appear to have reached lows, with the tightest credits trading at G+90 area – in line with the lowest levels we have seen historically.

New issues

• Aster Group re-opened the market in housing association bond issuance and provided the first benchmark issue this calendar year.
• They issued £250M at nine 1/2 years (2032) off their EMTN programme, which included £100M retained.
• Prior to the 2032 issue, they had 2036 bonds issued off their EMTN programme and a 2043 standalone issue.
• The market has seen greater use of EMTN programmes from housing associations, with Places for People also issuing several times in May.
• Aster exploited the dip in the yield curve at nine years, and by issuing prior to inflation rate announcements, avoided the sell-off and subsequent increase in gilt yields. They managed to lock in a 5.41% coupon, below 5.50% which is favourable in the current market.
• This highlights the flexibility the programme can provide issuers with, allowing them to tap into the market to determine when to exploit favourable pricing opportunities or pockets of investor demand.

Opportunities in a high-rate environment

• The present high-rate market environment offers borrowers an opportunity that has not been available since pre-financial crisis times.
• HAs can benefit from the current monetary tightening cycle by utilising the consequent rise in interest rates to restructure existing fixed arrangements, such as swaps sitting at the +5.00% level, or redeeming bonds with high coupons.
• The rate increase has caused a decline in the mark-to-market value of swaps and the redemption value of bonds, making them more affordable to terminate and creating the chance to restructure difficult legacy facilities.
• This may be useful for HAs facing difficulties in renegotiating covenants - for example in moving to EBITDA only - where lenders are not willing to facilitate a shift.

Private placement opportunities

• There has been no new issuance that Chatham is aware of in the private placement (PP) market over the last fortnight.

Banking market

• While interest rates have shown some volatility in recent months, this has not yet translated into increased pricing or margins from banks in the sector.
• Margins remain near their historic lows, but concerns about the economic environment and sector credit quality may lead to lenders becoming less accommodating over time.
• Chatham has observed an increase in the cost of hedging through embedded fixing, prompting borrowers to implement standalone swaps. We have also seen more lenders impose caps on the levels of embedded fixing on offer for borrowers.

RSH quarterly survey

• The reports highlight that cash balances are at the lowest level in almost eight years.
• Cash available reduced by £0.7B over the quarterly and is expected to reduce by a further £3.6B over the next 12 months from the £5.1B March 2023 figure.
  • This is partly due to cash reserves being used to fund development programmes.
• Some HAs have reported plans to reduce surplus cash in response to the rising cost of debt.
  • This is not surprising given the priority of the decent homes standard and focus on damp and mould repairs.
• The past 12 months until March 2023 saw the highest spend on capitalised expenditure on repairs and maintenance recorded at £2.7B.
• The sector has forecasted capitalised expenditure on repairs and maintenance from March 2023 until March 2024 to total £3.5B.

Economic news

• The BoE increased its base rate by 50 bps to 5.0%, the highest level since September 2008.
• This was in response to May inflation print, with CPI unchanged at 8.70% and core CPI on the rise again at 7.10%, up from 6.80% in April.

• U.K. inflation is significantly higher than peers with CPI at 8.70%, versus the EU27 at 7.10%, Germany at 6.30, France at 6.0%, and the U.S. (HICP) at 2.70%.
• The European Central Bank (ECB) raised its main refinancing rate by 25 bps to 4.0%, with the Federal Reserve keeping its upper target unchanged at 5.25%.
• Month-on-month GDP is estimated to have grown by 0.20% in April, following 0.30% in March. The main contributor was the services sector.
• The unemployment rate fell to 3.80%, coming in below consensus at 4.0%.
• May U.K. PMI figures (S&P Global Construction) came in at 51.6, indicating a modest expansion compared to the previous month at 51.1.