February 2021

February 2021

Commentary

Readers could be forgiven for being somewhat confused by headlines in the press on the back of the latest minutes of the Bank of England’s Monetary Policy Committee. On the one hand “Banks told to prepare for negative rates” and on the other “Pound rallies as negative rates seem less likely”. Getting behind the headlines, it is indeed correct that the Prudential Regulation Authority has reviewed the preparedness of the UK banking sector for a possible negative interest rates policy and concluded that it would take six months for banks to “implement tactical solutions to accommodate a negative Bank Rate…without material risks to safety and soundness”.

However, with the MPC voting unanimously to hold base rates at 0.1% such a move seems to be off the table for now at least. BoE Governor Andrew Bailey who has flagged the possibility of negative rates a number of times throughout the last year, seems to have backed off the idea for now, saying that the Monetary Policy Committee was “clear that it did not wish to send any signal that it intended to set a negative bank rate at some point in the future”. This view is in line with relatively bullish forecasts from the BoE suggesting that UK growth could rebound strongly later this year, with GDP returning to pre-pandemic levels by March 2022.

At the same conference, Mr Bailey made an interesting comment about the Bank’s bond portfolio saying “We are working now on the question of how we would, in a sense, arrange the structure of the bond portfolio to achieve a climate objective”. Along with moves towards national digital currencies, the adoption of climate related targets appear to be suspiciously coordinated across the world’s major central banks.

This of course chimes with the rapid adoption of ESG and impact related funding across global capital markets and following the successful launch of the Sustainability Reporting Standard for Social Housing last November, the housing sector is making significant strides in adapting its funding arrangements to fit this paradigm shift. We are seeing increasing interest from both lenders and borrowers to structure new bank facilities as sustainability linked loans with margin reductions linked to the borrower meeting certain ESG related KPIs agreed with the lender. One of the attractions of this approach is that the KPIs can be tailored to the borrower’s business and the areas that it may have targeted as priorities for improved performance. While the margin concessions we have seen thus far are relatively modest (in the 2.5-5bp range), delivering treasury savings in return for improving and/or maintaining performance in areas which deliver environmental and/or social benefit or impact seems like a win-win for both borrower and lender.

Interestingly, one lender has extended ESG-linkage to its derivatives offering, where its derivative credit charges can be similarly linked to ESG related measures, reducing overall hedging costs where KPIs are met. This is a new development and we expect other banks to adopt a similar approach as the market rolls this approach out across various product offerings.

In the bond market, Aster became the second HA to issue a sustainability linked bond from its Euro Medium-Term Note (EMTN) programme, following two previous issues from Clarion Group. The £250m, 2036 maturity bond priced 80 basis points (bps) below gilts with a 1.41% yield. Sustainalytics provided the Second Party Opinion, which assessed Aster’s sustainability framework. As with the loan market, we expect other issuers to follow this path and for this approach to also be adopted by borrowers and investors in the private placement market.

Overall, the HA funding market is moving rapidly towards more widespread adoption of various ESG and impact related financing structures – to the extent that over time, we would expect these approaches to become the rule rather than the exception as borrowers access the funding markets. The sector offers investors obvious attractions in this regard and with a recognised sector reporting standard available to housing associations, we are recommending to our HA clients that investment of time and resource in this area will reap clear benefits in terms of the availability and cost of funding to their businesses. Should you wish to discuss options in this area, please speak to one of the members of the Centrus team.

New bond issuances this month, in addition to Aster, include Great Places which has sold its £70m, 2042 maturity retained bonds pricing at 120 bps due to a strong order book and a yield of 4.75%. MORhomes also raised £22m for Housing Solutions through a tap of its 2038 maturity bond, achieving its lowest rate yet pricing at 160bps and a yield of 2.27%. Clarion and bLEND also tapped their bonds; Clarion’s 2048 maturity bond priced at 115 bps and 1.77% yield, while bLEND’s 2054 maturity bond pricing at 88 bps and 1.93% yield.

Financial Markets & Economic Overview

The successful rollout of vaccines has supported the positive risk and economic sentiment throughout the month of January, with the government targeting about 13 million jabs by mid-February, with the hope that lockdown restriction can start to ease soon after.

January UK Services PMI fell more than forecast to an 8-month low of 38.8, while the manufacturing index remained in growth territory (above 50) but declined to  52.9. However, PMI survey provides further evidence that the impact of restrictions on the economy will be less severe compared with the first lockdown given businesses and households have managed to adapt. In addition, UK GDP fell by 2.6% in November 2020 as government restrictions reduced economic activity.

Release from the Halifax HPI % YoY in January indicated that house prices in December were 6% higher than the same month last year with only a 0.2% rise   since November. The annual growth rate in the consumer price index (CPI) increased to 0.6% in December, from 0.3% in November. Slowly recovering to levels pre-November period.

The Bank of England’s Monetary Policy Committee (MPC) met during the first week of February with the BoE leaving policy on hold with the bank rate and the size of the asset purchase program left unchanged at 0.10% an £895bn respectively. In addition, the BoE provided an economic update with downward revision to Q1 GDP given current lockdown restrictions, but faster growth expected over the remainder of 2021. The BoE expect economic activity to rise back to Q4 2019 pre-crisis level by end Q1 2022, despite the BoE forecast change for the current quarter from expectations to a rise to a drop.

Over the last week of January, mood in markets became more risk-off with concerns about the speed of the COVID-19 vaccine rollout, particularly across the EU through the blockage of vaccines exports, except for the UK. This led to global equities having their worst-week since October, reflected in the movement of the FTSE100 in Jan-21. Furthermore, sterling also continues to hold strong against the euro and the dollar.

Interest Rates

Inflation

Capital Markets

Bank Credit