social housing | october 2019 - centrus financial · domestic uk investors. this reflects the...

Centrus Financial Advisors Ltd is authorised and regulated by the FCA.CONFIDENTIAL

TREASURY & DERIVATIVES | CAPITAL RAISING | FINANCIAL PLANNING & STRATEGY | ASSET FINANCE

Funding Conditions & Financial Markets Update

Social Housing | October 2019


2

Table of Contents

Commentary

Financial Markets & Economics Overview

Interest Rates

Inflation

Capital Markets

Bank Credit

Contact Details & Disclaimer


3

Commentary

With interest rates remaining anchored at historic lows, we continue to see significant interest from housing associationclients to lock into sub-3% long-term yields and by doing so, “out-performing” the assumed cost of borrowing built intotheir business plans. The institutional bid for housing paper remains strong, albeit that demand can be a little more patchyfor debt issued by housing associations with weaker credit ratings and higher exposure to sales, particularly amongstdomestic UK investors. This reflects the sensitivity to lower credit ratings of the capital models of insurers operating underthe Solvency 2 regime, perhaps as well as a greater familiarity with sentiment in the domestic housing market as politicaluncertainty continues to weigh heavily (no, let’s not go there this month…).

But overall, deals continue to attract interest across the credit spectrum with a growing body of US investors bolsteringthe established domestic players. Pleased as we are to support our clients in accessing funding rates of 2.5-3%, we wonderhow many of our readers would lend their own money out for 30 years plus at these sorts of rates? Long may it last from aborrower perspective, but we suspect that sometime down the track, these deals may be somewhat akin to the Libor plus25bps 30-year bank loans that some of our clients are still enjoying the benefits of. This possibility alone underlines theimportance of ensuring that the covenant packages relating to these transactions (particularly private placements as listedbonds are generally covenant light) are capable of standing the test of time and giving appropriate corporate flexibility tothe organisation in question. Without this, borrowers may one day be faced with challenging negotiations with an“underwater” counterparty where the alternative is the expensive prepayment of an otherwise attractively pricedinstrument. This relates to financial covenants of course but also consent points such as on-lending, mergers, grouprestructuring etc.

On a related point, borrowers and issuers which have previously accessed the institutional debt market or plan to do soare set to face increasing scrutiny from investors in relation to their Environmental, Social & Governance (“ESG”)credentials. This theme has been around for some time but over the last few years it has gathered greater momentum aspension funds, insurance companies and other asset managers face greater requirements to demonstrate to their internaland external clients that as well as financial returns being delivered, good stewardship can also be evidenced, in terms ofinitial credit assessment as well as on-going credit monitoring. We are already aware of clients with existing public bondsreceiving questionnaires from different investors following different in-house formats and requiring some fairly heavylifting in terms of data gathering and analysis.


4

Commentary

Slightly paradoxically, given the existence of the regulator and their existing oversight framework, the housing sector isprobably some way behind other parts of the market in terms of established frameworks, mechanisms and data sources withwhich to assess ESG from an investment perspective. The Real Estate market has a number of initiatives and industry bodieswhich have been up and running for some time which focus on different aspects of a fairly wide discipline both from theperspective of owners of real estate assets and wider investors and funds. One may question the robustness or indeedrelevance of some of the reporting which goes on, but there is at least some practice out there which the housing sector couldlearn from. The housing sector has perhaps felt less need to be proactive given some fairly helpful aspects to its make up.Without wishing to state the obvious:

• Regulated industry – check• Charitable status – check• Non-profit distributing – check

However, the whole ESG theme is moving beyond a phase where investors can “take it as read” that HAs meet their ESG needs.And while the Social and Governance elements of ESG are perhaps more obviously met, Environmental is more open toquestion and debate, particularly in relation to the vast “legacy” assets owned by the sector, rather than just new build which isperhaps easier to address. And it is the “E” where other sectors have invested time and effort in developing benchmarks. Thewhole subject of ESG has been covered at length in recent articles¹ in the housing press and while individual HAs will tackle thison an individual basis, they risk facing a significant workload in responding reactively to a wide range of investors makingvaried data and information requests of them.

We believe the time is right for the housing sector to get on the front foot and pro-actively develop its own bespoke approachand framework, using more broadly understood methodologies and measures built around widely available and consistentforms of data. Centrus is currently leading an initiative to get the ball rolling on this so watch this space…

Notable news from this month in the HA funding market included a sale of £75m of retained bonds by Optivo and £13.5m and£20m taps by THFC (Funding 3) and bLend respectively at yields below 2.5%. Bank of China also announced its first loan to thehousing sector to L&Q.

1. Example of articles:https://www.socialhousing.co.uk/insight/insight/making-an-impact-what-the-rise-of-esg-investment-means-for-social-housing-63040

https://www.socialhousing.co.uk/news/news/social-housing-a-natural-home-for-esg-finance-63041

https://www.socialhousing.co.uk/insight/insight/making-an-impact-what-the-rise-of-esg-investment-means-for-social-housing-63040

https://www.socialhousing.co.uk/news/news/social-housing-a-natural-home-for-esg-finance-63041


5

Financial Markets & Economic Overview

During the month of September, markets across the globe have primarilyfocused on Central Bank’s monetary policy decisions. As part of Draghi’sstimulus package designed to prevent the eurozone sliding into recession mainlydriven by Germany’s economic contraction: the ECB announced a further cut ininterest rate on the deposit facility by 10 basis points to -0.5%. The Bank alsorestarted its asset purchase programme at a monthly pace of €20 billion as from1 November and introduced a rate tiering system, in which part of banks’holdings of excess liquidity will be exempt from the negative deposit facilityrate. A week later, the FED, as expected, lowered the target range for its interestrate by 25 bps to between 1.75% and 2% due to concerns about global growthslowdown and trade wars. On the contrary, the BoE kept interest rates on holdat 0.75%. However, the Bank stressed that interest rates could move up or downif the UK left the EU without a deal, potentially leading to a cut.

Brexit talks was at the heart of the headlines especially after Boris Johnsonannounced at the beginning of the month that the parliament would beprorogued from 9th September to 14th October, giving anti-Brexit MPs just twoweeks to block a no-deal exit ahead of the deadline. This news impactednegatively the pound which weakened sharply by 0.5% against the dollar andthe euro following the announcement. However, both the Scottish Court and theUK Supreme Court ruled the suspension as unlawful and shortly after, MPsreturned to Parliament.

Surprisingly, discussions about the Trade War between US and China have beenrelatively calm in the month of September. At the end of August, Trumpannounced a rise in tariffs to 30% on $250bn worth of Chinese imports due totake effect on the 1st of October. According to the FED, Trade War hascontributed to 0.8% slowdown in the US GDP. However, at the G7 SummitTrump seemed optimistic about the trade discussions. Moreover, a ‘risk on’mood prevailed in the markets in mid-September reflected through an increasein global equities and a back-up in government bond yields as signs of progressin US-China talks which reduced some downside concerns about the globaleconomic growth.

Lastly, important to mention the attacks on one of the world’s largest oil facilityin Saudi Arabia by Iran triggering oil prices to spike 20% (biggest move since1990). The US imposed further sanctions targeting Iran’s Central Bank and theNational Development Fund of Iran.

*Market data in this report is as of the 30th September 2019 close of business.

Key market Indicators Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19

1 Month LIBOR 0.73% 0.73% 0.72% 0.71% 0.71% 0.72%

3 Month LIBOR 0.82% 0.80% 0.77% 0.77% 0.76% 0.76%

5 Year 6ML Sw ap 1.20% 0.96% 0.90% 0.68% 0.61% 0.60%

30 Year 6ML Sw ap 1.50% 1.28% 1.24% 1.06% 0.68% 0.71%

5 Year 1s6s LIBOR Basis 15 bps 14 bps 14 bps 14 bps 15 bps 16 bps

30 Year Gilt Yield 1.69% 1.49% 1.47% 1.32% 1.02% 0.97%

iBoxx 15y+ A Coll. Spread 147 bps 152 bps 145 bps 144 bps 145 bps 145 bps

iBoxx 15y+ AA Coll. Spread 111 bps 121 bps 116 bps 118 bps 121 bps 125 bps

iTraxx Bank 5y Senior CDS 69 bps 89 bps 66 bps 64 bps 59 bps 66 bps

FTSE 100 (pence) 7418 7162 7426 7587 7207 7408

Bank of England Base Rate 0.75% 0.75% 0.75% 0.75% 0.75% 0.75%

Commodities Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19

Brent Oil (US$) 73 64 67 65 60 61

Gold (US$) 1283 1304 1411 1423 1524 1471

Inflation Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19

RPI % YoY 3.00% 3.00% 2.90% 2.80% 2.60% -

CPI % YoY 2.10% 2.00% 2.00% 2.10% 1.70% -

Housing Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19

Nationw ide HPI % YoY 0.90% 0.60% 0.50% 0.30% 0.60% 0.20%

Halifax HPI % YoY 5.00% 5.20% 5.70% 4.10% 1.80% -

Average UK House Price 229,755 231,941 232,489 233,384 235,511 -

Average UK House Price YoY 1.18% 0.87% 1.36% 0.88% 0.43% -

Exchange Rates Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19

GBP/USD 1.304 1.263 1.269 1.221 1.217 1.229

GBP/EUR 1.163 1.132 1.117 1.098 1.107 1.127


-40-30-20-1001020304050

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1 2 3 4 5 6 7 8 9 10 15 20 30 40 50Tenor (year)

Swap Spreads Benchmark 6ML Swap Rates Gilt Yield

6

Interest Rates

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

Current Last Month 6 Months ago

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

Sep-

15N

ov-1

5Ja

n-16

Mar

-16

May

-16

Jul-1

6Se

p-16

Nov

-16

Jan-

17M

ar-1

7M

ay-1

7Ju

l-17

Sep-

17N

ov-1

7Ja

n-18

Mar

-18

May

-18

Jul-1

8Se

p-18

Nov

-18

Jan-

19M

ar-1

9M

ay-1

9Ju

l-19

Sep-

19

3M LIBOR 5yr swap 10yr swap 30yr swap

Benchmark 6ML Swap Rates, Gilt and Swap Spreads

LIBOR and Short Sterling Futures Curve (Forward 3ML) GBP LIBOR and Swap Rate Historical Rates

6ML Swap Spreads

Tenor CurrentSONIA 0.7101%

O/N 0.6603%1 month 0.7153%2 month 0.7438%3 month 0.7580%6 month 0.8268%

12 month 0.8895%

1 2 5 10 20 30 50

6mL Swap Rate 0.74% 0.66% 0.60% 0.64% 0.71% 0.71% 0.69%

1 month change (bps) 2 0 (1) 2 4 3 1

3 month change (bps) (11) (17) (30) (40) (51) (53) (53)

Tenor (year)

1 2 5 10 20 30 50

6mL Swap Rate 0.74% 0.66% 0.60% 0.64% 0.71% 0.71% 0.69%

Gilt Yields 0.46% 0.37% 0.28% 0.49% 0.88% 0.97% 0.88%

S. Spreads (bps) 28 29 32 16 (17) (26) (18)

Tenor (year)


-4.00%

-3.50%

-3.00%

-2.50%

-2.00%

-1.50%

-1.00%

0 5 10 15 20 25 30 35 40 45 50Tenor (year)

Current Previous

2.00%

2.50%

3.00%

3.50%

4.00%

1 2 3 4 5 6 7 8 9 10 12 15 20 25 30 40 50

Tenor (year)Current Previous

7

Inflation

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

RPI YoY CPI YoY 30 yr RPI swaps

UK Inflation Measure and Inflation Swap Rates

RPI Swap Curve Real Gilt Yield

UK Inflation and RPI Swap Rates

1 2 5 10 20 30 50

RPI Swap Rate 3.28% 3.66% 3.83% 3.73% 3.49% 3.22% 3.01%

IL Gilts -3.89% -3.68% -3.05% -3.01% -2.42% -2.16% -

Tenor (year)

CPI RPI CPI RPI CPI RPI CPI RPI

Index 107.9 289.2 107.9 289.6 107.9 289.5 108.4 291.7

MoM %Change 0.3 0.3 0.0 0.1 0.0 0.0 0.4 0.8

YoY %Change 2.0 3.0 2.0 2.9 2.1 2.8 1.7 2.6

May-19 Jun-19 Jul-19 Aug-19


8

Capital Markets

Primary Bond Market (Recent Issuances)

0.80%

0.90%

1.00%

1.10%

1.20%

1.30%

1.40%

1.50%

1.60%

1.70%

iBoxx A iBoxx AA iBoxx Housing

Amicus Circle Sovereign

Issuer Date Coupon Maturity Issue Spread

Total (£m*) S&P / M

Hastoe Jan-19 5.600% 2042 180 bps 75 - / -

Hastoe Jan-19 5.600% 2042 180 bps 25 - / -

Clarion Jan-19 2.625% 2029 148 bps 250 A / A3

Notting Hill Genesis Jan-19 2.875% 2029 173 bps 250 A / -

Futures Housing Feb-19 3.375% 2044 168 bps 200 A+ / -

MTVHA (Tap) Feb-19 4.125% 2048 175 bps 100 A- / -

MORhomes Feb-19 3.400% 2038 190 bps 250 A- / -

Incommunities Mar-19 3.250% 2040 157 bps 250 A+ / -

Home Group Mar-19 3.125% 2043 170 bps 350 A- / -

THFC (bLEND) Mar-19 2.984% 2034 150 bps 30 - / A2

THFC (bLEND) Apr-19 2.920% 2056 143 bps 20 - / A2

Southern** May-19 3.500% 2047 - 75 - / A2

Aster** May-19 4.500% 2043 - 20 A+ / -

Places for People May-19 2.320% 2034 206 bps 50€ - / Baa1

Places for People May-19 2.500% 2039 206 bps 100€ - / Baa1

PRS Finance May-19 2.000% 2029 69 bps 50 - / Aa2

THFC (bLEND) Jun-19 2.830% 2034 158 bps 25 - / A2

Accent Housing Jul-19 2.625% 2049 130 bps 225 A+ / -

Notting Hill Genesis* Jul-19 3.750% 2032 - 100 A- / Baa1

Clarion (Tap) Jul-19 3.125% 2048 130 bps 100 A / A3

Guinness Partnership* Jul-19 4.000% 2044 - 100 A / A2

Moat Homes* Aug-19 5.000% 2041 - 100 - / A3

Optivo Sep-19 3.283% 2048 - 75 - / A2

bLEND** Sept-19 2.390% 2047 - 20 -/ A2

THFC (Funding 3)** Sept-19 2.410% 2043 - 13.5 A / -

*Unless specified otherwise**Bilateral retained bond sales or tap

Secondary Bond Market

Credit Spreads

1 month 3 months 6 months

Affinity Sutton 4.25% 08/10/42 A/A3/- 126 bps 2 (0) (3)

THFC No.3 5.20% 11/10/43 A/-/- 139 bps 4 (0) (9)

Sovereign 4.77% 01/06/43 A+/A2/- 123 bps (2) 1 (8)

London and Quadrant 4.63% 05/12/33 A-/A3/A+ 145 bps 3 2 2

Amicus Horizon 5.25% 13/03/43 -/A2/- 140 bps 3 3 (4)

Circle Anglia 5.20% 02/03/44 A/A3/- 126 bps (3) (6) (12)

Genesis 6.06% 21/12/39 A-/Baa1/A 173 bps 3 (0) 1

IssuerSpread Change (bps)

30/09/2019S&P/M/FMaturityCoupon


9

Bank Credit

Bank Credit – Summary

*Following their Ring Fencing Transfer Scheme (RFTS), all Abbey National Treasury Services (ANTS) securities legally permitted within the ringfence will be transferred to Santander UK PLC. Non-permitted securities will remain with the non-ring-fenced entity, ANTS, with the view these will eventually be taken on by Banco Santander SA (London Branch).**LT Ratings are of Senior Preferred Debt.***iTraxx Banks CDS is a composite index comprising of 30 equally weighted credit default swaps on investment grade European entities.

All ratings are obtained from the respective bank’s website (as of 30th September 2019).

Entity Ring-Fenced /Non-Ring-Fenced

S&P Moody's Fitch 5y CDSMid-Spread (bps)

Spread Change (bps)

ST/LT ST/LT ST/LT 1 month 3 month 1 year

The Royal Bank of Scotland Group PLC Non-Ring-Fenced A-2 / BBB P-2 / Baa2 F1 / A 92 (2) (5) (118)

Natwest Bank PLC Ring-Fenced A-1 / A P-1 / A2 F1 / A+ 37 2 2 (27)

The Royal Bank of Scotland PLC Ring-Fenced A-1 / A P-1 / A2 F1 / A+ - - - -

Natwest Markets PLC Non-Ring-Fenced A-2 / A- P-2 / Baa2 F1 / A 82 (1) (1) (95)

Lloyds Banking Group PLC Non-Ring-Fenced A-2 / BBB+ P-2 / A3 F1 / A+ 82 (3) 0 (99)

Lloyds Bank PLC Ring-Fenced A-1 / A+ P-1 / Aa3 F1 / A+ 46 (3) 2 (54)

HBOS PLC Ring-Fenced A-2 / BBB+ P-1 / Aa3 F1 / A+ 48 (2) (9) (54)

Bank of Scotland PLC Ring-Fenced A-1 / A+ P-1 / Aa3 F1 / A+ 48 (2) (10) (56)

Lloyds Bank Corporate Markets PLC Non-Ring-Fenced A-1 / A P-1 / A1 F1 / A - - - -

Barclays PLC Non-Ring-Fenced A-2 / BBB P-3 / Baa3 F1 / A 92 (2) (7) (119)

Barclays Bank UK PLC Ring-Fenced A-1 / A P-1 / A1 F1 / A+ - - - -

Barclays Bank PLC Non-Ring-Fenced A-1 / A P-1 / A2 F1 / A+ 64 (1) 4 (67)

Banco Santander SA Non-Ring-Fenced A-1 / A P-1 / A2 F2 / A- 35 5 (7) (55)

Santander UK PLC* Ring-Fenced A-1 / A P-1 / Aa3 F1 / A+ 71 (0) (10) (60)

HSBC Holdings PLC Non-Ring-Fenced A-1 / A P-1 / A2 F1+ / AA- 58 (1) 10 (67)

HSBC UK Bank PLC Ring-Fenced A-1+ / AA- NR / NR F1+ / AA- - - - -

HSBC Bank PLC Non-Ring-Fenced A-1+ / AA- P-1 / Aa3 F1+ / AA- 38 3 8 (35)

Nationwide Building Society** N/A A-1 / A P-1 / Aa3 F1 / A+ 58 0 (2) (50)

Allied Irish Banks PLC N/A A-2 / BBB+ P-2 / A3 F3 / BBB- 81 5 5 (45)

MUFG Bank Ltd. N/A A-1 / A P-1 / A1 F1 / A 45 (1) (1) (54)

iTraxx Banks*** N/A - - - 66 8 0 (73)


10

Bank Credit

Bank Credit – Group Level 5Y CDS Mid-Spread Historical

0

50

100

150

200

250

RBS LLOYDS BARCLAYS HSBC SANTANDER iTraxx


11

John Coleman

d: +44 (0) 203 946 0379e: [email protected]

LONDON

10 Queen Street PlaceLondon | EC4R 1BET: +44 (0) 203 846 5670

centrusfinancial.com

Contact Us

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Disclaimer

“Centrus Group” consists of Centrus Corporate Finance Limited and its four wholly owned subsidiaries; Centrus Financial Advisors Limited, Centrus Advisors Limited, MDT (UK) Limited andMDT Rail Lease Management Limited.

Centrus Corporate Finance Limited is a limited company incorporated in England and Wales number 07943605.Centrus Financial Advisors Limited is a limited company incorporated in England and Wales number 10203539.Centrus Advisors Ltd is a limited liability company incorporated in Republic of Ireland number 547394.MDT (UK) Limited is a limited company incorporated in England and Wales number 2036221.MDT Rail Lease management Limited is a limited company in England and Wales number 11090252.

Registered office for all UK legal entities is at 10 Queen Street Place, London EC4R 1BE. “Centrus MDT”, “Centrus Advisors”, “MDT Rail Lease Management” and “Centrus” are trading names ofCentrus Corporate Finance Limited.

Centrus Financial Advisors Limited is authorised and regulated by the Financial Conduct Authority Firm Reference Number 750011. Please visit www.fca.org.uk for more information. CentrusAdvisors Ltd is a limited liability company incorporated in Republic of Ireland number 547394. Registered office at WeWork Iveagh Court, Block D, Harcourt Rd, Dublin 2. Directors: P Jenkins(UK), Eamonn Egan (INED) and J Murphy (Managing Director). Centrus Advisors Ltd is a Tied Agent of Centrus Financial Advisors Limited, which is authorised and regulated by the FinancialConduct Authority.

This report or document or any of its content must not be distributed or passed on, directly or indirectly, to any other person without the express written consent of Centrus. Nothing withinthis document should be construed as investment advice and should not be relied upon.

All of the views expressed in this report or document accurately reflect the personal views of the responsible employees of the Centrus Group.

The information contained in this report or document has been compiled by Centrus from sources and using data believed to be reliable and unless stated otherwise should be assumed to beusing end of day data, but no guarantee, representation or warranty, express or implied, is made by Centrus, its affiliates or any other person as to its accuracy, completeness or correctness.Centrus is under no obligation to update, modify or amend the information. All opinions and estimates contained in this report or document constitute Centrus’ judgement as of the date of thisreport or document, are subject to change without notice and are provided in good faith but without legal responsibility.

This report or document is not an offer to sell or a solicitation of an offer to buy any securities. This material may be prepared for general circulation to clients and may not have regard to theparticular circumstances or needs of any specific person who may read it. To the full extent permitted by law neither Centrus or any of its affiliates, nor any other person, accept noresponsibility for and shall have no liability for any loss (including without limitation direct, indirect, consequential and loss of profit), damages, or for any liability to a third party howeverarising in relation to this report or document (including without limitation in relation to any projection, analysis, assumption and opinion in this report or document).

Data is sourced from various sources including Reuters, Bloomberg, Markit and Centrus Market Data.

social housing | october 2019 - centrus financial · domestic uk investors. this reflects the...

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