Moat bond priced at a spread nearly 50 per cent higher than previous issues
Welfare reform fears could hit landlords’ bonds
Fears more tenants will fall into rent arrears as a result of welfare reforms have hit landlords’ creditworthiness, according to sector analysts.
The warning comes after the latest housing association bond - Moat’s £150 million issue last Friday - was priced at a spread over gilts (the price of government bonds) nearly 50 per cent higher than those of other associations over the past 12 months.
However, record low, long-term gilt rates - which measure the cost of government borrowing - meant that the overall cost of funds for Moat was comparatively low at 5.1 per cent.
The spread over gilts of 147 basis points was significantly more than the 100 basis points achieved by Peabody when it launched its bond in March.
Sources close to the deal said changes to the housing benefit system that will see the end of widespread direct payment to landlords was the main source of investor concern.
Since January 2010, the spread over gilts of housing association bonds has generally been between 100 and 115 basis points. The spread achieved by Moat is the highest since December 2009.
Neil Waller, a banking partner at law firm Trowers & Hamlins, said: ‘The margins are creeping up because of the uncertainty in the sector, particularly around the payment of benefits. I’m surprised that spreads have been so low [up until now]; perhaps the market is catching up with the sector.’
Mr Waller added: ‘It’s great to have achieved such a competitive price but people shouldn’t lose sight of the fact that the reason isn’t that the sector is particularly creditworthy.’
But those involved in the Moat deal said the higher spread was a result of the same market forces that have driven down gilts, as investors sought to benefit from the overall drop in funding costs.
‘If you’re looking at spreads in isolation from current market conditions, you’re looking at them in the wrong way,’ said Paul Rickard, a director at Trade Risks, which acted as arranger for Moat.
‘While Aa2 spreads were 100 basis points at the beginning of the year, they were 250 basis points after the collapse of [US investment bank] Lehman Brothers.’
Brian Johnson, chief executive of Moat, said: ‘There’s a slightly unhealthy obsession with spreads; what was important for us was getting the right coupon [interest rate] and the end result was still good.’
Mr Johnson added that Moat’s issue was 135 per cent oversubscribed. The 15,000-home landlord will retain £50 million of the bond for possible future issuance.
Royal Bank of Scotland and Santander were joint bookrunners on the deal.
The Moat deal comes a week after ratings agency Moody’s downgraded its outlook for Hyde Group’s Aa2 rating, prompting concerns about the sector’s creditworthiness.
Inside Housing has been calling for more equitable benefit reform as part of its What’s the Benefit? campaign.