May 2020

May 2020

Commentary

 

We have run several webinars over the last six weeks, on COVID-19 business planning, a market update earlier in April and a more interactive session on 30th April again on business planning in response to client requests for more on that topic. (Please do feel free to suggest future topics or offer feedback.)

The second business planning session pulled out more detail reflecting some of the discussions we have had with clients and with lenders and investors over the last month. We won’t repeat all the detail – the slides have been circulated and can be forwarded on request – but there are some interesting nuances which won’t necessarily be immediately obvious to boards and external stakeholders. For example:

  • The P&L impact of rent arrears is heavily linked to the organisation’s bad debt provisioning policy. This should reflect any differences between recovering COVID-19-related bad debts and any others. It might be worth considering that in the context of the current reporting season’s discussions with auditors.
  • Some associations will have data (or realistically maybe just corporate memory) on their experience in 2008-10 on shared ownership sales rates and values, changes in tenure of development schemes (including opportunities coming from private developers), staircasing rates, shared ownership defaults – any information of this nature is very helpful to contextualise what you might be assuming this time around, notwithstanding that the economic impact on different groups in society is potentially different from during the early phase of the financial crisis.
  • People are looking carefully at how the current situation ends or evolves: when will sites open up and what will timescales look like, what will inflation look like over the medium term even if depressed in the short term, what will be the pressure on major repairs and fire safety works in 2021/22 if a lot is pushed back from 2020/21.

The net effect on liquidity – slower revenue but also delayed cash outflows – is positive in the sense of less funding required, for most associations. This is broadly what we expected from the outset, although some associations are extending liquidity partly as a conscious decision to be able to take advantage of opportunities which may arise later in the year and partly in response to broader uncertainty and volatility. It has been widely reported that several associations are taking part in the government’s Covid Corporate Financing Facility scheme which again reduces pressure on accessing market funding in the short term at least. Overall, most associations have a strong liquidity position and deals are being priced across the banking, private placement and public bond markets, giving confidence to those associations with upcoming liquidity needs.  That said, we do continue to advise that additional time should be factored in in relation to funding processes, particularly if funding is likely to involve forming new banking relationships or a lot of work around security due diligence and valuation.

On the banking front, we continue to see some mixed signals in terms of banks’ responses to the current crisis. Generally, the noises coming from the banks that we and our clients work with are supportive of the sector and the borrowers they lend to. We have however seen recent evidence of banks re-visiting previously issued terms in response to changes in their credit outlook or their own cost of funds. At the same time, other clients continue to receive competitive offers of new funding that they would have been happy to accept prior to COVID-19. While this may simply reflect the different circumstances of individual lenders, it is also somewhat reminiscent of 2008/09 when the bank market responded to events much more slowly than the bond market. To be clear, the implications of the current crisis for the banks are very different to those prevailing in 2008/09 but once again, given the mixed messages, we recommend allowing a bit more time around bank funding and options around a Plan B should responses be less positive than expected.

Finally, many readers will be aware of an exciting project, initiated and led by Centrus together with wide group of co-sponsors and participants to develop an ESG framework for investment in the UK social housing sector. Having delayed publication as a result of COVID-19, we are expecting to launch the draft White Paper on 6th May. This will kick start a sector wide consultation process with a view to refining the methodology and a finalising a set of recommendations in order for the sector to have a broadly agreed baseline for ESG reporting. Keep an eye out for further detail from Centrus and in next week’s edition of Social Housing and please contact Phil Jenkins or Lawrence Gill at Centrus should you have specific questions about the White Paper or ESG and Impact reporting more generally.

 

 

Financial Markets & Economic Overview

 

April saw a brief respite across financial markets as policymakers continued to backstop credit and funding markets and investors moved into riskier assets.

S&P left Britain’s credit rating unchanged, citing a swift response in combatting the economic impact of the coronavirus outbreak. S&P expects Britain’s economy to contract by 6.5% this year.

Britain plans to sell £180bn of bonds in the next three months to finance emergency measures. The Bank of England agreed to directly finance the state’s spending needs on a temporary basis, allowing the ‘Ways and Means Facility’ to rise to an effectively unlimited amount.

UK Gilts rallied in response to policy measures aimed at supporting the functioning of markets. The 10-year yield ended the month lower at 0.23%. Corporate spreads also narrowed over the month and are at elevated levels compared to pre-crisis but stabilised compared to the peak in late March.

The UK’s manufacturing and services industries suffered the biggest slump on record in April. The UK PMI slumped to 12.9, down from 36 in March. 50% of companies surveyed cut their workforce, with many staff furloughed.

In the Eurozone, GDP fell 3.8% in Q1 compared to Q4 2019, the fastest fall on record. The ECB announced that it would begin lending to banks at ultra-low rates as Eurozone banks increase their expected credit loss provisions.

In the US, annualised GDP fell 4.8% and jobless claims hit 30m. The FOMC left rates near zero at its final April meeting, warning of lasting ‘medium-term’ economic fallout, and committed to using its ‘full range of tools to support the US economy’. Despite this, equity markets posted their best month since the 1980s. Crude oil futures briefly turned negative as a supply glut put downward pressure on oil prices.

China reported that its first quarter GDP contracted by 6.8% in 2020 from a year ago. The official manufacturing Purchasing Managers’ Index for April came in at 50.8, as compared to 52.0 in March. Economic data from China will continue to be watched by investors for further clues as to whether the country’s economy is bouncing back.

 

Interest Rates

Inflation

Capital Markets

Bank Credit