Heightened market volatility, a sharp rise in global interest rates and increased flexibility for restructuring derivatives has reignited queries from our clients about derivative valuations and restructuring or unwind costs. Large swings in the value of derivative portfolios have put ever more scrutiny on accounting valuations and how these are presented in accounts.
In this refresh of the original 2017 white paper, we take a refreshed look at derivative valuations:
1. Mark-to-Market of a derivative or ‘mid MtM’, represents the Net Present Value of all future projected cashflows to be received and paid, discounted at a risk-free rate (SONIA, SOFR, €STR). This is valued on the same basis as that typically received in valuation reports from banks and is still often used for accounting purposes.
2. Transaction value of a derivative is the ‘Mark-to-Market’ taking into account credit, bank funding, regulatory capital implications as well as trading costs. It may also factor in the bank’s (or corporate’s) wider derivative portfolio, wider strategy, and commercial considerations. These factors may impact a derivative valuation when unwinding or restructuring a derivative prior to maturity.
3. Accounting value of a derivative can be the same as the ‘Mark-to-Market’ described previously, but increasingly often takes into account certain accounting valuation adjustments that depend on the relevant accounting standard. 10 years on from its implementation, IFRS13 puts a greater emphasis on credit valuation adjustments to the ‘Mark-to-Market’ for accounting purposes which mirror a transaction value. In some cases a funding valuation adjustment is required too.
Centrus has formed a new commercial partnership with Community Housing Cymru (CHC), the voice of housing associations in Wales.
CHC represent and support 36 housing associations in Wales, with members providing almost 165,000 homes to 10% of the Welsh population.
Why did Centrus want to be a CHC commercial partner member, and join up with the Welsh housing association sector?
“Following a long-standing relationship with Community Housing Cymru (CHC), Centrus is delighted to join as a commercial partner. As the leading treasury and corporate finance advisor to the affordable housing sector in Wales, we are proud to join the CHC community and importantly see our membership as a further way of supporting our housing association clients by playing our part in enabling CHC to represent them and the sector overall.”
What benefits can Centrus bring to our housing association members and the work that they do?
“We provide independent treasury and corporate finance advice to housing associations focused on enabling our clients to deliver against their objectives, proactively managing associated risks, and demonstrably maximising value for money.
“Our highly specialist affordable housing team has over 200 years combined experience spanning banking, derivatives, debt capital markets, equity, and financing strategies. We also provide treasury reporting and sophisticated technology solutions from Centrus Analytics to a full spectrum of housing associations.
“Centrus is a financial services group committed to sustainability, real assets and essential services – we believe in finance with purpose. Centrus is committed to exemplifying high standards of verified social, governance and environmental performance, as exemplified by our Certified B Corporation status.”
What services do you offer?
Corporate finance advisory (debt and equity, mergers, capital raising, hedging and risk management).
Retained treasury advisory (proactive engagement and support, regular market data, treasury management policy and strategy, business plan assurance, credit rating analysis, hedging structuring & execution, stakeholder management).
Centrus analytics (treasury reporting and sophisticated technology solutions).
Interview with Paul Stevens originally published on CHC website.
Below is a snapshot of what I found to be the most compelling messages cutting through.
Less mouth more trousers
Globally we have bold 2030 investment and 2050 net zero commitments in place, but as the clock ticks and the breaching of our planetary boundaries becomes increasingly terrifying; the time for talk has passed and we need action and delivery.
In Glasgow, it was reassuring to see the huge range of technology and project development that is already on the table. Exhibitors showed off pioneering assets across wind, solar, hydrogen, marine, private wire, hydro, interconnection, carbon sequestration and energy storage. With consumer expectations adding huge weight to the support they need, we are seeing decisions on execution and investors becoming bolder with the risks they are taking. Private and Public Sector funds are now going where the problems are.
Swap the plans and promises with action
The presenter’s lineup was strong. In the opening plenary session, Jacqueline McLaren, The Lord Provost of Glasgow, Humza Yousaf, First Minister of Scotland, David Bunch, Country Chair of Shell, Chris Stark, CEO of the Climate Change Committee and Susan Aitken the Leader of Glasgow City Council took to the stand. They shared their concerns and conflicts, but they also shared their commitment, raising their hands to admit that disagreements need to be put aside. Together they recognised that scientific, public, corporate, council and government teams need to collaborate on the common net zero targets if we have any chance. This hope was backed up by the exhibitor population from across all pieces of the puzzle. The development across the renewable energy product life cycle is gathering pace every week and it was underpinned by a common theme of less talk and more action.
‘Just’ must be everywhere
The other message that resonated for me was the recognition that the word ‘just’ has to play a key part in every component of energy transition. We must show that we have learned lessons from damage done by industrial change in the past – all close to home in Glasgow. We must include the education, social and people impact at every step of the way. Recognising the jobs and education opportunities that the green economy must grow was shouted about by the strong academic research in the visitor population as well as the carbon literacy and renewable energy studies from the students in attendance. It was impressive stuff.
Centrus exhibited in a central hot spot for attendee footfall: we were neighboured by Tesla, The University of Edinburgh, Shell and ETZ. The contributions from our energy transition and infrastructure corporate advisory team were very strong, with everyone working hard to show off the Centrus brand, our sector expertise and our credentials. We connected with over 100 new and existing contacts and will reach out to identify opportunities where we can provide support. B Corp as a certification was relatively unknown to this audience, (with the exception of Thrive Renewables PLC) and our B Corp branding raised many interesting discussions about the value of using your business as a force for good.
There was lots of promise: I hope that the pioneering ambition of Scotland’s renewable energy transition that was shown off at All Energy Glasgow 2023 translates into further operational examples by this time next year.
If you want to discuss the event, the themes arising or the role that Centrus is playing, please get in touch with George Roffey, Sustainability Officer – Centrus.
Centrus Communities is proud to have sponsored the Tour de Lunsar 2023, Sierra Leone’s largest cycling race, promoting an exciting future for professional cycling in West Africa.
Inspired by the world beyond his home, the mining town of Lunsar which has no cycling heritage to speak of, Abdul Karim Kamara launched the Lunsar Cycling Team from his bicycle repair workshop in 2013. The shop has since moved to bigger premises and become a focal point for the community.
Ten years later, the Tour de Lunsar has grown in size and reputation, attracting cyclists who want to make it professionally.
The 2023 edition of the event started on the 26 April, Sierra Leone’s independence day, with men’s, women’s and junior races, all of which take place on non-closed roads, competing with traffic and causing lengthy tailbacks.
The men’s race is split across four stages. The first starts in Freetown, the country’s capital, and each stage ends in Lunsar.
The women’s race and junior races are single stages culminating in laps of a circuit in Lunsar.
There were 141 competitors in total. 51 riders took part in the men’s race, 19 in the women’s and 70 in the junior competition.
Centrus is proud to have sponsored the event for a third year. It is a pleasure to support the incredible Lunsar team as they continue to grow youth confidence and achievement through cycling in Sierra Leone.
Another month, another bank rescue. Sounding like the beginning of a Star Wars film, the First Republic has been rescued! Or has it fallen? Banking stress in the U.S. and Europe is a reminder of how quickly confidence can erode. The rapid response by authorities was reassuring but the impact on the financial system of rising interest rates and falling asset prices is still playing out, with the US regional banking market the current focus. Are we in a credit crunch?
Long term gilt prices have been relatively stable in recent months. Looking forward the UK Government will supply plenty, with £240 billion of issuance per year until 2028 expected. With the Bank of England no longer a buyer, will prices fall and yields rise further? Asset reallocation is to be expected in a higher interest rate environment. And the pension risk transfer market is predicted to be red hot for the rest of 2023. That means companies looking to lock in their defined benefit pension scheme liabilities with insurance companies who in turn look to buy appropriate assets to offset the liabilities. There is still £1.5 trillion of DB pension scheme promises on UK corporate balance sheets. So, some support for gilts is to be expected, and one silver cloud for the sector is the demand for direct investment in social housing, infrastructure, and regeneration projects. Whether the extra supply of gilts will be soaked up and the Government (and everyone else) can avoid higher borrowing costs is the question.
Spreads on housing association bonds for A+ and A rated credit are broadly where they were a year ago having fallen and stabilised since the autumn volatility. Markets are favouring stronger credit and A- credit spreads are notably higher than a year ago.
Pressure on the social housing sector and its response
The Regulator of Social Housing reminded us of the pressure the sector is experiencing in its latest quarterly survey report. The average 12-month interest cover (excluding all sales) over the last three years has been 131%. For the year to December 2022, it was 102%, the lowest ever recorded and for the year to December 2023 it is forecast to reduce to 93%. The December 2023 outcome is driven by increases in projected spend on capitalised repairs and maintenance (£0.9 billion) and interest payable (£0.4 billion), offset by increased net cashflows from operating activities (£1.0 billion). If it were not for the 7% rent increase and the sector showing agility to control operating cost, it could be a lot worse.
The Regulator confirmed that several housing associations have obtained loan covenant waivers in response to increasing investment in existing stock, with 26 reporting having agreed a waiver to exclude the exceptional costs of building safety works from loan covenant calculations, and 22 waivers being reported in respect of energy efficiency or decarbonisation works. In our own development appraisal assumption survey, we noted that most respondents now have decarbonisation beyond EPC of C in their base business plans.
Based on our recent activity with clients, the housing sector is currently focused on redefining strategy and bank restructuring rather than raising debt in the capital markets. Appetite from banks is steady with key lenders still committed to growing loan books. There is a clear sense of impactful strategic thinking by the sector, and preparation for the future.
Further banking stress, inflation not falling or the economy not performing as expected are examples of what can weaken the outlook. Some investments will be difficult to justify in the higher interest rate environment and there is evidence of weaker liquidity in M4 money supply. But so far it would appear this era will be remembered for the impact on the financial system and the economy of high inflation and interest rates.
Whether we call this a re-set, a credit crunch or anything else doesn’t really matter. What matters is cautious and strategic financial management. The importance of strong liquidity and prompt re-financing is as important as ever. With the possibility of further contagion, counterparty risk is a critical consideration requiring careful allocation of investment assets.
This week, our team spent the day volunteering at Blackfriars Settlement – cooking and serving lunch to their wonderful Positive Ageing Group.
Blackfriars Settlement is a busy community organisation in London’s North Southwark. Originally set up by volunteers back in 1887, the centre aims to support the most vulnerable in the community and make life better.
Thank you to the Blackfriars Settlement community for a fantastic day! For more information on how to get involved, click here.
Centrus has appointed a new Assistant Director, Damianos Boulakis, who joins from Rothschild & Co’s investment banking team.
With prior 9+ years’ experience at Rothschild, Rubicon Capital Advisors, KPMG and PwC, Damianos has advised institutional and private investors on a number of equity and debt related transactions across real assets space with an emphasis on social infrastructure, energy transition, digital infrastructure and regulated utilities.
Damianos joins the Real Estate team as Centrus continues to grow its corporate finance advisory offering across operating real estate enterprises, affordable housing and social infrastructure and with a focus on mergers and acquisitions, joint ventures and equity & debt capital raising services.
“We are delighted to have Damianos come on board. He is a talented and highly skilled professional with significant M&A, equity & debt capital raising experience. We are well positioned to deliver high quality, independent advice to our clients building exceptional real estate enterprises.”
Omer Fazal, Head of Real Estate – Centrus
“I am pleased to join Centrus’s talented team and I look forward to contribute to the team’s continued success.”
Keynote speaker at ‘Introduction to Offshore Wind’
We are pleased to announce that Centrus will be the keynote speaker covering offshore wind financing and investment for the UK Renewables Academy’s four day offshore wind programme in September 2023.
“Understanding the principals about how windfarms are financed, bought and sold is critical to understanding the life cycle of a windfarm. This topic is gaining increasing importance as farms get bigger and more expensive. Securing an adviser of Centrus’ quality and experience in this area is an exciting development for the UK Renewables Academy.
Centrus’ insight will no doubt make for an extremely interesting seminar and we look forward to welcoming Centrus to Teesside University in September.”
Liam McIvor, Director – UK Renewables
“We are delighted to be involved in a programme focused on increasing knowledge and understanding around the renewables and offshore sector.
Our work with Ofgem, advising on £5 billion of recent and ongoing Offshore Transmission Operator (“OFTO”) sale processes, has given us a unique insight into how the UK can achieve its targets of 50GW of offshore wind by 2030.
As a certified B Corporation, Centrus is passionate about delivering solutions for a sustainable future, securing energy resilience and funding the energy transition to net zero”.
Adam MacDonald, Managing Director – Centrus
The course has been specifically designed and developed alongside leading industry professionals to give participants an understanding to every area of the sector. The course is also applicable to those who are experienced in one particular area and want to have a better understanding of the wider industry.
“At Centrus, all ideas and feedback are welcome. Our regular surveys assess employee engagement, identify areas of improvement, and track progress over time. They also help to build trust and communication as our growing business retains the pieces we treasured as a startup.
We are very proud to share a few results highlights from our Q1 2023 survey.” George Roffey, CSPO – Centrus
For more information on working at Centrus, click here.