Pricing in a rising market
Published May 2022
Rising Gilt yields are pushing the cost of debt up, with the last three social housing issues, all in April, being over 3%. There is a real cost to delays on execution as every extra month is currently costing borrowers several bps. The ability to be nimble and to work with an experienced team with proven track record of delivery/execution is key.
2022 has heralded a new era in the Sterling bond market, with the unprecedently low rates of the Covid period now firmly behind us. A combination of inflation, rising interest rates, supply chain bottlenecks and the economic impacts of the invasion of Ukraine has produced a deep volatility within markets that threatens to complicate things for borrowing housing associations.
|HA public bond issuance since March 2022|
|Label||Nominal Amount (£)||Rating||Issue Date||Term (yrs)||Spread over Gilts||Cost of funds|
|bLEND Funding PLC (tap)||Social||55,000,000||-/A2||Mar-22||26||1.32%||2.90%|
|bLEND Funding PLC (tap)||Social||52,000,000||-/A2||Mar-22||32||1.42%||2.95%|
|bLEND Funding PLC||Social||125,000,000||-/A2||Apr-22||35||1.70%||3.51%|
With pricing on the rise, timing is crucial
The Covid period saw unprecedently low costs of debt issued by housing associations, but now that rates are rising the question of how to achieve best pricing has returned to the fore. In a volatile market pricing becomes harder to gauge and predict, and execution strategy and timing more important. The pricing strategy can be the difference between a strong orderbook and a weak one, and will be decided by the issuer and their lead managers.
HAs attract funding in choppiest of markets
In early March bLEND was the first to come to market with a long-dated Sterling bond issue since the temporary shutdown caused by Russia’s invasion of Ukraine. As a result of the absence of deals, investors had cash to place, but uncertainty remained high. Initial Pricing Thoughts were set wide to draw investors in, but over the morning a strong and varied orderbook built up which allowed bLEND’s execution team to tighten in significantly. Therefore the New Issue Premium (NIP) achieved was only 14bps, comparable with those seen in the market prior to the temporary shutdown.
bLEND returned with a second deal at the end of April after another quiet period in the Sterling market. Early in the process it was decided to create a new series with a 2057 maturity rather than tap bLEND’s existing 2047 series. This allowed the borrowers to take advantage of the inversion of the Gilt yield curve, which meant that the 2057 Gilt yield was 14bps lower than that of the 2047. The drawback was that a new sub-benchmark series would incur a premium on the spread, however the inversion would mean that the all-in rate would be comparable to a tap of the 2047s, but with the borrower getting an extra ten years of maturity on the loan. This decision was reached by the borrowers—ForHousing, Taff and Worthing Homes—and bLEND, along with bLEND’s lead managers and the borrowers’ treasury advisor, Savills. The rate achieved, 3.5% for 35 years, was well within the range targeted by the borrowers at the outset.
Alex Morgan, Director at Savills Financial Consultants, said “Savills Financial Consultants are pleased to have been able to support three clients accessing the capital markets through bLEND, despite the challenging economic back-drop. Aligning the three borrower’s timelines allowed for the issuance of a new bond at a significantly longer maturity than was being considered individually, as well as ensuring a more security efficient transaction at a similar all-in cost.”
bLEND did not place IPTs too wide as there was already an expectation that there would be limited tightening through the day, due to the sensitivity of the orderbook. This transaction reaffirmed the importance of execution, and of targeting pricing with the right strategy.
Jigsaw, which like bLEND has an A2 rating from Moody’s, announced a transaction on the same day. The all-in rates achieved by bLEND and Jigsaw were comparable, with the latter achieving a tighter spread, but bLEND pricing over a lower Gilt yield.
Kirsty Garrett, Director at Lloyds Bank Corporate Markets, who were one of the lead managers for the bLEND transaction, said of the deal “Lloyds was delighted to support bLEND on their most recent transaction. The global new issue markets continue to be challenging but navigating them well to print a new sub benchmark 35 year bond, at levels very close to their existing 25 year, is a testament to the quality of the issuer, the track record they have built and their nimble and pragmatic approach to the market. Primary market issuance continues to highlight secondary curves are not a true reflection of where investors are ready to deploy cash, but there is cash available and it is important to not lose sight of the fact that long dated coupons are still attractive, rather than focus purely on the optics of a new issue premia, where the components in the formula are flawed.”
This demonstrates that the complexities of pricing can only be made sense of in the context of the borrower’s business plan and strategy. The borrower is not in competition with where rates were one year ago or where they will be in a year, but rather is in competition with their business plan. Does the cost of funds match with assumed costs?
Will Stevenson, THFC’s Deputy Treasurer, notes “In this context 3.5% for 35 year paper, while a far cry from the sub-2% rates seen in bLEND during the pandemic, represents significant value within a business plan and in an inflationary rates environment. In a time of greater volatility and rising costs of funding, borrowers will need to think carefully about how best execution can be achieved.”
Timing has also proven to be a decisive factor, with the Gilt yield rising c. 20bps in the week between the pricing of the 2057 series and the bond’s close. Having an experienced team that can issue even in a difficult market can enable borrowers to take advantage of rates where they stand, rather than risking waiting for a more certain market but with higher overall rates.