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Negative interest rates could create uptick in private placements, say housing figures
Private placements with deferred drawdown arrangements could become more attractive if the Bank of England (BoE) decides to introduce negative interest rates, housing experts have suggested.
Housing associations may look to reduce the amount of cash they are holding and lock in deferred deals in order to avoid any costs brought by negative interest rates.
As the BoE looks to navigate the uncertainty brought by the coronavirus pandemic, leading figures at the bank have left the door open to the possibility of negative interest rates, with Andrew Bailey, governor of the BoE, saying it would be “foolish” not to consider the option.
Richard Petty, lead director of Living Advisory at JLL, told Inside Housing that the impact of such a move could see a shift away from large own-name bonds to smaller private placements in order to avoid large amounts of cash brought in by bonds.
He said: “I can see more private placements than public issues going forward and a widening scope of registered providers who take advantage of that.
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“This is because you can structure them in a way that allows deferred drawdowns, so you don’t have a big lump of cash sitting in the bank.”
Deferred drawdown deals allow borrowers to complete deals at current market rates but receive the cash at a later date.
Larger own-name bonds are done via public debt markets, whereas private placements use single private lenders such as banks or insurance companies.
Piers Williamson, chief executive of The Housing Finance Corporation, said it is unlikely that associations will be able to borrow at negative rates but also suggested that deferred drawdown deals could be attractive.
“The cost of deferment may get to zero and that could be an attractive feature to associations because a lot of them need to finesse the need for capital in 18 months or so,” he said.
The current BoE benchmark interest rate stands at an all-time low of 0.1% after it was cut in March in response to the COVID-19 pandemic. Andy Haldane, chief economist at the BoE, has refused to rule out a further cut that would take the benchmark rate in to negative territory.
Patrick Hawkins, director at Savills Financial Consultants, agreed that an uptick in private placements with deferred arrangements is a possibility.
He said: “Many housing associations are sat on more cash than usual so those low, and potentially negative, interest rates are more of an issue than they were before the coronavirus lockdown. So I think that is something that all associations should be mindful of.”
Mr Hawkins noted that housing associations must judge the balance between the cost of carrying cash and the premium that is usually included in deferred deals, adding that “the margin is usually quite fine”.
