April 2021

April 2021

Commentary

Just in time for the re-opening of pub beer gardens, the Easter Bank Holiday weekend seemed to plunge us back into distinctly wintery weather with hail and snow seen across the UK. As lockdown restrictions hopefully ease, along with the unseasonal cold snap, economists are predicting that the UK economy will come roaring back to life for the rest of 2021, with pent up consumer demand to the fore. The Bank of England’s additional QE measures undertaken last October have also contributed to M4 – the measure of non-financial broad money supply – growing at an annual rate of 16%, with some economic forecasters warning of inflationary risks and even the Bank of England’s Chief Economist Andy Haldane has talked of the UK economy being “poised like a coiled spring”.

Rising inflation expectations help to explain the significant moves in gilt yields over the last 12 months or so and particularly since Christmas. Around this time last year, 30-year gilt yields hit a low of 0.55% but have since increased significantly to their current level of c.1.3%. As the bell-weather benchmark rate for longer dated housing association debt issuance, this represents a significant move and one that treasurers will be keeping a close eye on following an extended period of benign and borrower friendly market conditions. For the time being, credit spreads at or near to record tight levels are keeping long-term borrowing costs at attractive levels but further material increases in gilt yields would start to change this equation. Given this backdrop, clients with fixed rate borrowings at the lower end of policy ranges may want to consider options for putting additional hedging in place to protect against growing inflationary pressures and the potential knock-on effects on interest rates.

In other news, Centrus was very pleased to have advised Anchor Hanover Group in a ground-breaking bank refinancing announced at the end of March. The deal represented two “firsts” in the housing sector. The £300m RCF is the first syndicated sustainability linked loan in the housing sector and in addition, Anchor Hanover becomes the first housing association to move its entire banking and stand-alone hedging book on to a fully unsecured footing. The new three-year facility features four banks, Barclays, MUFG, NAB and Santander, with two of the banks lending on a fully unsecured basis to a housing association for the first time.

As always, the strategy undertaken reflected the needs and objectives of the borrower in question and it remains to be seen whether this will be the first of a number of housing associations to move banking arrangements to unsecured. Aside from the obvious benefits of reducing costs and administration associated with a rolling programme of charging and undertaking due diligence on property security to bank lenders, liquidity is improved by taking security readiness out of the equation for drawdown. For interest rate hedging, the sector has traditionally operated on the basis of one-way posting of collateral (either cash or property security) with no posting of collateral by the hedging counterparty. This has always been something of an outlier to the way that other corporate borrowers interact with lenders – the norm being unsecured or both parties posting collateral each way. The benefit of unsecured hedging is the avoidance of margin call risk under hedging contracts, albeit that counterparty risk still exists.

To date the limited amount of unsecured funding has been more focussed on capital markets, for example A2Dominion and Places for People first explored this a number of years ago. For banks, unsecured is to some extent an easier proposition in the context of a full refinancing of existing banking arrangements in order that all bank lenders are put on to a pari passu footing. For many HAs, large out of the money embedded hedging arrangements or legacy low margin bank facilities mean that full refinancing will not be an attractive option for some time yet. There is also a tenor aspect – older facilities may have many years still to run whereas most banks are only really prepared to offer unsecured on a short-term basis, three years or five years in line with a funding model of long-term capital markets term funding and short-term bank liquidity. However, with pre-2008 banking facilities now well into their amortisation phase, the opportunity to consider a “big bang” approach may not be that far away.

The Anchor Hanover transaction has been discussed above. In March we concluded a number of banking transactions for clients including a group restructure and simplification of Abri Group following the partnership formed a year ago between Radian and Yarlington Housing Group. We have also seen progress in several transactions to allow more generous on-lending arrangements for associations looking to undertake a higher proportion of land-led development which tends to necessitate delivery through group subsidiaries which in turn require on-lending.

In the capital markets, Centrus advised on one social housing sector private placement in March, for Your Housing Group. In public markets both bLEND and MorHomes tapped for additional lending while Chelmer Housing Partnership and Onward Homes raised new funding, with Chelmer’s a tap at a spread of 134 basis points for £50m (notional), and the Onwards transaction was a debut issue of £215m (with a further £135m retained) at a spread of 88 basis points. As noted at the start of this month’s update, the strongest credits in particular, continue to attract very tight spreads as demonstrated by Onwards, one of a select group of Moody’s A1-rated associations.

Financial Markets & Economic Overview

Having endured a long and strict lockdown for all the first quarter, the UK economy is now gradually reopening. The vaccine rollout continues to keep pace and now all over-50s, or roughly half the population, have been offered a first dose.

The success of the rollout has led to a boost in sentiment and levels of business optimism not seen since 2014. This is evidenced by strong UK Manufacturing and Services PMI data for March. Manufacturing PMI was revised to 58.9, representing the steepest month of expansion in factory activity since February 2011. Whilst the Services PMI rose to 56.8, far above the reading of 51.0 markets had anticipated, signifying the first expansion in the services sector since October 2020. In addition, UK GDP rose 1.3% against the previous quarter, the second consecutive quarter of growth.

The annual inflation rate eased to 0.4%, in February of 2021 falling short of market expectations of 0.8% with clothing and footwear remaining the biggest lag on prices. The Bank of England anticipate inflation to rise towards the 2% target in the first half of this year, mainly driven by energy prices, but not helped by the supply chain issues faced both globally and domestically caused by Brexit.

In the property market, the Nationwide House Price Index increased 5.7% year-on-year in March 2021, easing from a 6.9% rise in February. This is possibly a reflection of a softening of demand ahead of the original end of the stamp duty holiday before the Chancellor announced the extension in the Budget.

Sterling traded just below $1.380 at the end of March, not far from the previous week’s seven-week low of $1.367. This can be attributed to concerns over new coronavirus variants that are currently impacting the rest of Europe offsetting hopes of a smooth transition in opening the economy back up.

Interest Rates

Inflation

Capital Markets

Bank Credit