May 2021

May 2021

Download Market Update – May 2021

 

We have given our monthly report a bit of a makeover as you have hopefully noticed. The basic contents are similar i.e. general market comment, economic update, and detail on recent deals. However, we have moved “deals” information into a new section, with more detail than in the past. We will continue to respect client and market participants’ desires for confidentiality e.g. around pricing of bilateral transactions whether or not they are transactions where Centrus has been involved.

These things need mixing up every now and again, but also we wanted to create more space for discussion of specific transactions which we think are of potential interest to readers, in a clear and accessible format. Please let us know if you have any feedback.

A connected reason is that we anticipate a growth in transactions which are more complex than straight debt. That would include partnerships with an ‘investment’ flavour, such as the recent Hyde/M&G transaction but also project-specific joint ventures and also corporate change such as mergers and partnerships.

Business planning season is well underway. Many clients will be quite far down the road of designing and agreeing modelling assumptions, but just to flag a couple of areas we’ve been discussing with clients in recent weeks, where nuances to the presentation can be helpful to achieving board buy-in:

  • Macro-economic variables have seen more movement in recent months. The main story is the rise in rates – mainly in February across GBP and other rates markets – which has stalled since but left rates at higher levels than at Christmas.
  • On inflation the story is perceptions of potential rises. The long-term RPI level implied from the GBP gilts market is now around 3.5%. This is in the context of knowing that from 2030 RPI will most likely align with CPIH which is close to CPI … in relation to which the Bank of England has a 2% policy target which it shows no indication of wanting to change.

For board members (and particularly those who follow financial markets) it will be important for them to be able to form a considered view on the plan and risk analysis which is up-to-date as to facts about the economic environment as it is now. So for them, it is good to be clear that rates have moved. In our experience, it can be useful to explain clearly the level of headroom in the base case rates and also to reference the role of stress testing in understanding the implications of movements in macro-economic variables.

The flavour of the month for economic optimism just now appears to be small-cap equities rather than real estate, but house prices as ever appear to be holding up. This is helpful for HA business planning! Most associations make some form of reference to the Bank of England stress test scenarios in this context. BOE stress tests are about bank capital adequacy – all about the balance sheet and subtly different from the context of HA stress testing, where the focus is on the implications of a period of adverse external and organisation-specific factors. What this means in practice is that the most useful single number to take from the BOE stress test parameters tends to be the idea of modelling a house price fall of around a third.

For banks the ‘downside’ rates environment is typically a low and flat yield curve, the opposite for what hurts most borrowers, albeit the BOE also reflects on the scope for funding spreads to rise (albeit not by much for investment-grade credits). Lastly, just to note that the main 2021 stress test papers contain, as ever, a useful discussion of GDP and unemployment levels albeit for most clients this is general context rather than a source of specific numbers.

This month has seen a lot of client discussion on these topics; please contact your usual Centrus contact if input from ourselves would be useful in these areas.

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