The return of sub-benchmark issuance: a strategic opportunity for housing associations

A question of size — a return of sub-benchmark issuance on the horizon?

Chatham expects an increase in housing association (HA) capital markets issuance through the end of 2024 and the beginning of 2025. One trend that we may see is the re-emerge of sub-benchmark public bond issuance.

Having heavily relied upon the banking market over the past two years, many HAs will find themselves with shorter-tenor debt portfolios (10 years or less) and lower fixed-rate ratios. This increases refinancing risk and interest rate risk. One approach to reducing these risks is to "term-out" shorter-dated floating-rate debt and replace it with long-dated capital markets issuance, which is naturally structured on a fixed-rate basis.

However, many HAs are hesitant to take this step. Boards worry that locking in at the top of the rate cycle may mean higher interest bills in the long-term and reduced capacity for their businesses to invest and grow. How do we balance these competing priorities?

Recent years have seen significant activity in this space from existing capital markets borrowers through retained bond sales and taps of existing issues. Aggregators and HAs with Euro Medium Term Note programmes (EMTNs) have also been active in smaller size, allowing them to capitalise on favourable pricing dynamics or pockets of investor demand.

One area where we have seen less activity is issuers approaching the market in small size on new deals. Chatham believes that small-to-mid size issuers may still benefit from issuing public bonds with notional amounts between £100M and £200M.

This "sub-benchmark" issuance was more prevalent in the past but has fallen out of vogue in recent years.

Since the early 2010s, there has been a greater focus on larger-sized deals. The reasoning is simple. Larger bond issues should offer investors greater liquidity in the secondary market, allowing them to efficiently adjust positions in the future or sell bonds if needed. Greater liquidity should drive demand in the bookbuild process, delivering competitive tension and tighter spreads. Larger sized bonds may also become eligible for inclusion in bond indices, which are widely used by investors to benchmark performance. This can create latent "index demand" from passive investors.

Together, these should help improve pricing outcomes for HA bond issuers and reduce illiquidity premia. We can see this size-trend in the chart below, where the average amount of bonds sold upfront (not including retained) has increased from c. £165M in the period 2011–2019 to £248M in 2020–2024.

A similar pattern is evident when we focus on the smallest issue sizes in the primary market annually. This remains true despite greater use of small-sized opportunistic issuance from several EMTN issuers, such as Places for People (PfP).

While size can hold many benefits for HA borrowers in the bond market, it may be off-putting for those with smaller funding requirements who cannot stretch to issue over £200M. Instead, these HAs usually look elsewhere for debt, including the private placement market, bank term loan market, and aggregator funders.

However, we suggest that the public market may still offer benefits, even in smaller size on an own-name basis:

• Tighter pricing:
  • Private placements will price with an "illiquidity premium" to compensate investors who cannot trade out of private placement notes.
  • While sub-benchmark issuance may command a degree of illiquidity premium, it should in most cases, be less than in the private market.

• Better financial covenant suites:
  • Most public issues price with only an asset-cover covenant, compared to more comphrenseive financial covenant suites in the private and bank markets.
  • Lighter covenants can help future proof the business plan, aligning terms and increasing capacity across facilities.

• Fewer corporate covenants:
  • Fewer corporate covenants reduces restrictions on mergers, permitted reorganizations, and financial support.

• Ability to easily and quickly upsize:
  • This is an efficient process for upsizing through taps and retained issuance.

Given low issuance volumes over the last 12 months, we expect public market investors to be more receptive to sub-benchmark deals. High investor demand creates favourable conditions for potential borrowers, as there are few comparable benchmark bond issues competing for investor attention. We may also see demand from investors traditionally focused on private credit but unable to deploy capital exclusively in the private market. We are working with clients to assess funding options against key considerations, such as managing a credit rating and mitigating execution risk.

Borrowers looking to the capital markets should add sub-benchmark listed issuance to their range of options, alongside aggregator and private placement borrowing. There may be significant benefits available, particularly for those with requirements in the £100–200M range.

Please get in touch with a member of the Chatham team if you would like to discuss your funding strategy and market approach.