November 2019

November 2019



Another month, another small step closer … to Christmas. On the “other thing”, which Santa is probably as sick of as the rest of us, the plan now seems to be to resolve the biggest single issue of our times with a general election on the assumption that the wisdom of crowds will speak now with a clear and authoritative voice … we shall see!

In the meantime, one might think there would be plenty of policy announcements on housing – but so far if you type in “Labour Party manifesto housing” you get a page headed “Help write Labour’s 2019 manifesto” and the main announcement by the Conservatives has been the idea of shared ownership in smaller chunks, which has been widely panned. Not least as several associations have explored these issues themselves and as we understand it – to the extent after thinking about it more closely people still thought worth exploring – in the past had found no government favour for the idea. Our Phil Jenkins wrote an article 1 on the “10% shared ownership” proposal for Social Housing magazine flagging the lack of obvious reason why a putative home-owner would want 10% of the upside for 100% of the running costs, the fact that mortgage lenders might share similar concerns, and considering some of the technical issues which would need looking at.

Also as highlighted in our thought piece 2 featured in Social Housing Magazine in July (search for ‘golden opportunity’ – who said social housing articles can’t double up as click bait) another colleague John Tattersall explained that we continue to see increasing activity around clients exploring the case for wholescale refinance of existing treasury portfolios, in particular legacy bank loans. Several have now been completed or are in the implementation stage. The passage of time gradually crystallises the value in low margins whilst also over time the compromises in keeping legacy debt can feel more onerous. Examples of completed transactions include Livin, Newport City Homes and, most recently, North Wales Housing Association; case studies can be found on our website. Accent, with a bond issue earlier in the year, is in similar territory. It is not coincidental that two of the examples relate to Welsh RSLs. Centrus has a significant client base in the Principality and the business case for addressing legacy bank funding arrangements can be very compelling.

The business case often includes, amongst other elements: right-sizing the number of bank relationships; covenant alignment; improved funding mix between bank and capital markets (increasing the weighted average life of the portfolio as a whole as well as putting in more long-term fixed rates ideally in a more covenant-light format so fewer concerns over break costs). The key benefit is typically additional corporate flexibility and debt capacity to enable a step change in delivery of a growth agenda. This can be a complex area and ensuring boards are well informed and in control of the journey is vital.

In terms of capital markets news in the month:

  • Centrus is pleased to have advised a client on the first tap of MORhomes since its debut in February. The deal is a good outcome for the borrower given its objectives of speed of execution and risk mitigation before a potential Brexit. The senior MORhomes bonds were tapped for £38.6m (as part of a £40m deal) at a senior bond spread of 175bps. The transaction attracted a new issue premium of 7bps and the yield on the senior bonds was 2.788%. The all-in rate for the borrower is just over 3% after c. 25bps of other costs are taken into account. The transaction shows that on an all-in basis a MORhomes transaction can currently be done at a spread of c. 200bps to Gilts.
  • THFC no 3 issued £13.5m of its senior bonds in early October at a yield of 2.41% or a spread of 148bps to Gilts. The estimated all-in costs to the participating borrowers are 2.66% (spread of 173bps) after c. 25bps of costs. THFC also tapped its 28-year Blend issue for £20m for Wales & West at a rate of 2.39% or a very similar 143 bps spread (2.64% and 168bp spread after costs).
  • Three own-name issues – LiveWest, Wrekin and Sovereign, all benchmark-sized issues and at spreads vs the relevant gilts of 140 bps, 148 bps and 127 bps respectively. Fair to say that these underline the relative value of own-name public debt if the issuer, product and market are right.


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Financial Markets and Economics Overview


Brexit talks were at the heart of the headlines in October. Despite Boris Johnson winning support for his Brexit deal in the House of Commons, he lost the vote for an accelerated timetable that would have allowed the UK to leave the EU by the 31st October. The EU has however, extended the deadline for the UK to leave the EU to 31st January 2020, whilst the UK Parliament has voted to hold general election on 12th December. The outcome of the election will determine the next stages of the Brexit process. The fast-moving political developments in October has prompted sterling to jump from around $1.22 to touch $1.30, rising by more than 5.53% against the US dollar – its best performance jump since May 2009. A no-deal Brexit has always been a big risk to the value of the currency; however, the event of this happening is now less likely. Instead, sterling’s progress is now complicated by the possible outcomes of the December election.

Inflation in the UK remained unchanged since August’s levels at 1.7%y/y, which is its lowest level since December 2016. Whilst inflation levels remained stagnant, low mortgage rates fuelled an increase in UK house prices in August, as average prices rose 1.3% y/y in August, which was an increase from 0.8% in July.

The longevity of low interest rates persists, as the Federal Reserve cut its benchmark interest rate by 25 basis points to 1.75%, which was its third cut this year. The decision was widely expected; however, the market expects that policymakers will now keep interest rates on hold in December and with any further easing, if any, to come next year. Yet, a preliminary US-China trade deal and the fading prospect of a no-deal Brexit could increase business confidence, which raises the odds of a pause in rate cuts.

Other central banks are also on hold for now. The ECB has left its monetary policy unchanged at its October meeting following the September stimulus package. This is despite headline CPI falling to a near three-year low of 0.7%y/y , which is well below the bank’s target levels. Given the ongoing Brexit and global economic uncertainties the Bank of England is also expected not to leave its benchmark rates unchanged. Mark Carney’s tenure as the Bank of England governor is scheduled to end at the end of January, however, the appointment of the next Bank of England governor was delayed until after the election.

Germany has been hit particularly hard by global trade tensions, as the economy is possibly due to enter a technical recession this quarter.


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