Landlords tap the capital market despite rise in the price of borrowing
Landlords defy ratings warning with £325m bonds
Housing associations have defied this month’s decision by credit ratings agency Moody’s to put the sector on a negative outlook by launching a glut of bond deals.
Circle and Radian have issued bonds worth a total of more than £300 million, while Amicus Horizon and London & Quadrant are also set to tap the capital markets.
But the price of bond debt is on the increase, with Radian issuing its £75 million deal at a spread of 275 basis points above gilts giving an all-in cost of borrowing of 6 per cent. The spread indicates the price paid above government borrowing, while the all-in cost is the return investors receive.
The market had expected a deal from the 18,000-home landlord at the start of February, priced significantly lower at 200 basis points and a 5.1 per cent yield. That pricing would have been similar to Circle’s £250 million bond issued last Thursday at 198 basis points, producing a 5.22 per cent yield.
Circle, which has 63,500 homes, said the deal ensured its business plan was fully funded for 10 years.
As recently as January, bond aggregator The Housing Finance Corporation issued a bond at a cost of less than 5 per cent.
Analysts have claimed the increased cost for Radian was not a result of the change in outlook from Moody’s on the social housing sector, but because investors baulked at the limited size of the offer when alternative deals were on the market.
‘They were at the back of a long queue so investors could be picky,’ said Piers Williamson, chief executive of THFC.
Andrew Newberry, finance director at Radian, said that £75 million would be sufficient to fund its development programme, which includes 536 ho-mes to be delivered under the Homes and Communities Agency’s affordable homes programme. He added that borrowing more money could leave it ‘burning a hole in our pocket’.
Mr Williamson said the length of the pipeline of bond deals - driven by the continued absence of long-term bank debt - gave investors ‘an excuse to increase pricing’.
Calum Mercer, finance director at Circle, said investors had dismissed Moody’s warnings. ‘They did not raise it as a significant issue,’ he stated. ‘[Yield] levels around 5 per cent are attractive to lock in for 30 years.’
L&Q is expected to come to market with a bond of around the same size as Circle’s before the end of April.
Mr Williamson said that an issue from the 67,000-home landlord would be ‘the real acid test of the market’.
In numbers: bond pricing
4.94 per cent
THFC bond (January 2012)
5.22 per cent
Circle bond (February 2012)
6.03 per cent
Radian bond (February 2012)