There may be no better time than now for associations to approach the bond market

In the wake of March’s c.25% stock market correction, and the associated ‘flight to quality’ to bonds, the market shutdowns in US dollar and euro markets were shorter.

Once markets reopened, investor appetite was only for household names and at very wide spreads. Diageo was the first corporate issuer to approach the sterling bond market again in late March with a nine-year deal. This deal, while it was executed, gathered an extremely price-sensitive order book and consequently did not tighten as much as would have been expected in a more normal market.

This appeared to show that asset managers were more focused on looking inward to assess portfolios held rather than looking outwards at opportunities to buy new bonds. In the secondary market, investors were reportedly selling out of more liquid/higher-quality bonds to increase their cash positions, with this then distorting secondary levels.

At the same time as grappling with market volatility, investors were having to deal with the move to home working and the ensuing impacts to decision-making chains.

By early April, it was felt that the market was showing enough stability for primary issuance. Having held investor meetings in early March, prior to lockdown, Optivo made the decision at the turn of the month to issue a 15.5-year maturity made up of £150m of day one bonds with a further £100m retained. Optivo was able to print at 2.3% higher than equivalent government borrowing, a yield of 2.86% and a new issue premium at the time of 0.35%.

Just after the Optivo transaction, the Bank of England (BoE) announced two significant quantitative easing (QE) programmes, which were to prove a turning point in stabilising the bond markets.

First, a £200bn ‘conventional’ QE programme (buying gilts in the secondary market). Second, further details of the BoE’s corporate QE programme came through with the aim of supporting entities that impact the UK economy. Housing associations on the initial list include Home Group, L&Q, Notting Hill Genesis and Sovereign.

The programme allows the purchase of bonds in the secondary market for trades of between £1m and £20m nominal. The BoE will look to purchase at least an additional £10bn in corporate bonds, taking the stock of purchased bonds to at least £20bn.

Add to this the launch of an 18-month innovative commercial paper purchasing programme for investment-grade credits and the removal of any limit on the government’s short-term ‘Ways and Means’ facility, and it becomes clear that the UK’s central bank has established a serious armoury of schemes to promote overall market liquidity. Perhaps the lessons of 2008 have been learned.

Tightening secondary spreads following the BoE announcement encouraged Sanctuary to launch a 30-year £350m bond that priced at 1.7% higher than equivalent government borrowing. At the time this represented a new issue premium of zero. A significant number of investors were engaged via large group conference calls rather than the usual one-to-one meetings.

The sterling market has adapted to the ‘new normal’ and now encourages issuers to go for investor update calls rather than the hitherto typical so-called ‘dog and pony’ (roadshow) meetings.

In mid-April, the Guinness Partnership launched a bond with a maturity of 30 to 35 years. Significant investor demand allowed Guinness to upsize the transaction from £350m to £400m (of which £150m was retained) at a credit spread of 145 basis points for 35 years.

This represented a new issue concession of zero, the same as Sanctuary’s bond the previous week despite secondary levels tightening in the meantime. Secondary levels have tightened by a further 0.05% since pricing, suggesting further appetite from investors for strong credits at this maturity.

In the utilities sector Thames Water Utilities Finance and National Grid Electricity Transmission both priced 20-year deals in mid-April. Both of these came at zero new issue premium, suggesting that investor demand for longer-term deals remains very strong. Tesco was also able to place a 10-year deal 0.1% inside of implied secondary trading levels.

Investors continue to prefer long deals, guided by actuarial advisors. These may be making revised mortality and morbidity assumptions in the wake of coronavirus and are advising their clients to purchase longer-duration, investment-grade bonds. This was demonstrated in Guinness’ deal and investors’ requirement for long-term paper appears to be an ongoing trend for the time being.

“Housing associations should remain liquid with cash and revolving credit facilities in place to fund immediate needs, and be in a position to react quickly when long-term opportunities arise in the bond or private placement markets”

This demand is expected to be finite so issuers looking at placing long-term bonds should move quickly while it remains an issuer’s market.

Moody’s was due to review the UK sovereign rating on 17 April. At this stage Moody’s has chosen to keep the rating at Aa2 with a negative outlook – which is very good news for the social housing sector because of its link to the UK sovereign rating, and may indicate that the ratings agency is taking a measured approach to the potential impact of COVID-19.

So what are the learning points from the past few weeks? The sterling market can take its time to react to a true ‘black swan’ event. However while investors sit on the market sidelines, cash positions still build up to a point where after a few weeks they have to invest (perhaps particularly with the spectre of potential negative interest rates in the background).

Housing associations should remain liquid with cash and revolving credit facilities in place to fund immediate needs, and be in a position to react quickly when long-term opportunities arise in the bond or private placement markets.

Our sector remains a desirable place for institutional investors to put their long-term cash to use, as associations are strong regulated credits, backed by real assets and stable cash flows with implied government support – and are generally accepted as counter-cyclical investments.

At the time of writing, investors’ cash positions appear to remain high, so with gilt yields being near record lows and credit spreads continuing to tighten, despite the economic uncertainty, there may be no better time than now to approach the sterling bond market.

Will Stevenson, deputy treasurer and relationship manager, The Housing Finance Corporation