Housing associations look to term out short-term debt

Market update

Economic news

• The U.K. market was relatively unaffected by U.S. economic news over the past fortnight. On 1 May, the U.S. Federal Open Market Committee (FOMC) unsurprisingly held the target fed funds rate at 5.25%–5.50%, citing a “lack of further progress towards the committee’s two percent inflation objective.”
• U.S. Fed Chair Powell noted a rate hike is still “unlikely” at the next Fed decision. This coupled with weaker U.S. employment and payrolls announced on Friday preserved market expectations of around two cuts by year-end.
• Following the announcement, the 10-year U.S. Treasury yield was 4.63% (1 May) and has since dropped to 4.46% (7 May). The current 10-year Treasury is 24 basis points through the year-to-date high of 4.70% (25 April) and 38 basis points above the year-to-date low of 4.08% (8 March).
• The 10-year U.K. gilt yield is 4.15% (7 May), 22 basis points through the year-to-date high of 4.37% (1 May) and 51 basis points above the year-to-date low of 3.64% (2 Jan).
• Key U.K. economic announcements this week include the Bank of England (BoE) rate decision on 9 May, jobless claims on 9 May, and GDP on 10 May.

Social housing sector themes

• The battle between rent inflation uplifts (CPI+1%) and higher cost inflation continues to compress business plan margins into the new financial year, stalling plans for development of new homes. Registered providers (RPs) may generate headroom by replacing restrictive covenants (or temporary carveouts) with permanent beneficial terms.
• Many RPs are seeking methods to term-out drawn short-term revolving credit facilities or expiring loans with medium- to long-term fixed-rate debt. This reduces refinancing risk and preserves revolving facilities for backstop liquidity vehicles.
• Standalone derivatives, opposed to embedded fixed-rate swaps, may help RPs maintain fixed- to floating-rate ratios required by TMPs, while building in future flexibility to fix at lower rates. As part of this process, housing associations are working on new hedging policies. These aim to set rules around how and where hedging is transacted and any trade-offs as part of the hedging process. For example, balancing longer-term certainty from a longer-dated hedging instrument against duration and mark-to-market or collateral risk (particularly where hedging is cash collateralised).
• To build agility into the borrowing process, RPs can get ahead of stock valuations and security identification to speed up issuance and reduce execution risk. Chatham is working with RPs to establish new relationships with security trustees and identify “buckets” of stock for collateral.
• Clarion Housing updated its sustainability framework along with its £3 billion Secured Euro Medium Term Note (EMTN) Programme. Currently, there are 16 RPs with EMTN programmes, representing over £8.3 billion of housing association capital markets debt. Clarion is currently the second largest housing association EMTN issuer (c.£2 billion sold) behind Places for People (PfP) with c.£2.9 billion sold. The former has historically approached the market fewer times for larger issuance size, compared to PfP’s more active strategy of selling smaller notionals across a wider range of maturities and currencies.

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