In the last five years, we have seen powerful new shifts in the way companies and other organisations obtain finance.
These changes place more real money from savers and investors into real economy borrowers, such as universities and infrastructure projects.
“We’ve returned to a simpler funding model, with a virtuous and mutually beneficial circle of capital.”
Phil Jenkins, Managing Director and Founding Partner, Centrus
Finance directors and corporate treasurers have never had so many funding options.
These changes follow a first phase of change when, after the financial crisis, banks retreated from lending to re-build their capital bases and work through problematic loan portfolios. Slowly but steadily, the management teams of mid-sized companies, utility firms, housing associations, universities and infrastructure projects identified a new group of finance providers.
But, from about 2013, markets started changing again, gravitating towards a simpler, lower risk and more transparent financing model where the users and providers of long-term capital interact more directly. This return to simplicity is creating a virtuous and mutually beneficial circle of capital. It is reminiscent of the nineteenth century building societies, mutuals and credit unions that provided so much of the finance required for housing and community infrastructure. Although today’s version includes sophisticated systems that manage data and reporting.
The modern funding model can also be characterised as finance with purpose. This is illustrated by UK pension funds and insurance companies generating stable and reliable returns by directly financing renewable energy, transport, power and water infrastructure or new affordable housing. In addition to direct, pension fund investment , the new finance features a rapidly growing direct lending market and new alternative income funds – with issuers and borrowers often supported by the advice and technology of imaginative and independent corporate finance houses.
At the same time, and partly in response to these changes, banks have instituted fundamental changes to their lending focus, making fewer long-term loans and freeing up capital for short-term lending. They are also selling legacy long-term loan and swap exposures to those investors with a natural appetite for long-dated assets to match pension and insurance liabilities.
This report explains the main features of the new finance and maps them out graphically. We hope you and your colleagues find it helpful.
On the 12th October 2018, Jason Murphy and Mark Taheny, members of the Centrus Dublin team participated in the ‘Shine A Light’ fundraising event which took place at The Law Society, Blackhall Place to raise much needed funds for Focus Ireland. This was Jason Murphy’s, MD for Centrus in Ireland, second year taking part in this moving event. Focus Ireland are a non-profit organisation that provide homeless services to the people of Ireland. The aim of ‘Shine a Light’ Night is to bring the business community together for one night to raise awareness and crucial funds and to stand in solidarity and ‘shine a light’ on those experiencing homelessness in Ireland today.
In Ireland, Family homelessness has reached historic numbers with over 3,800 children currently living in emergency accommodation, often unable to get to school and rarely getting a home cooked meal.
Shine A Light took place the evening after Ireland was hit by a severe storm, so rain continued to fall in buckets with our team members settled in for the night equipped only with pieces of cardboard and sleeping bags. Jason and Mark share their thoughts on the experience.
“This is my second year participating in the Shine a Light event. My motivations remain the same, which is
a) raise awareness of the family homelessness issue in Ireland,
b) raise funding for this issue and
c) shine a light in particular on the volume of children in Ireland who are homeless.
In my professional capacity I am already fortunate enough to work with some amazing housing charities who have helped many families find a home. Through this work I have a good knowledge of the housing sector and the issues being faced by all stakeholders and I have had the opportunity to use my skills to assist these excellent charities to deliver on their objectives of providing more homes for those who are in most in need. My participation in Shine a Light has always been more focused on raising awareness (as opposed to just fundraising)with other business leaders in our community so that they can use their respective skill sets to come together to make a real impact on a very complex issue.
I mentioned in my story that every child should be able to come home and put down their schoolbag in the security of knowing they can put it down in the same place tomorrow. For many children (over 3,800 in Ireland today) this is not the case. I am so grateful to all those who have donated to the campaign (in particular to those who have donated for a second year) to help us exceed our target and also to all those who have engaged with us on the journey. I hope I am inspiring others to either take part or ask the question “how can we help?”. This year’s sleepout has continued to give me further motivation to raise awareness of the family homelessness issue in our country and I continue with my pledge to sleep out every year until I see a material resolution of this problem in Ireland” – Jason Murphy
“2018 has been a year of firsts for me – my first year with Centrus, my first time working with Approved Housing Bodies and my first year sleeping out as part of the Shine a Light campaign. I wasn’t sure what to expect on arrival (despite all I had read about previous years), but what I experienced was very different to anything I could have imagined. It was an eye-opening experience, where business leaders come together in a low profile setting to educate themselves on the current issues in homelessness, hear peoples first hand experiences, to discuss some of the highly practical ways in which we can all make a difference and to sleep out for one night to better understand how difficult it really is.
As a first timer, two things really stood out to me:
My own naivety around the current crisis, the root causes of homelessness and what it is going to take to really make a difference.
The amazing work that is being done by every volunteer, social worker and fund raiser.
I may not have gotten a wink of sleep that night, partly due to the hard ground, heavy rain and cold air, but, once it was over, I got to go home. I realise now that it is everyone’s responsibility in the country to fix this homelessness crisis and none of us are really ever that far from being homeless ourselves. One or two unfortunate events could leave any of us in dire need of the essential services provided by charities like Focus Ireland. Sincere thanks to all those that supported myself and Jason this year and we hope to have your continued support in futures as we try to play a relatively small part in the solution to this crisis”. – Mark Taheny
Jason and Mark set themselves a target of €10,000 to raise for the event. With the kind donations and match-funding from Centrus Communities, they exceeded this and €10,029.74 was raised for Focus Ireland. Collectively, all participants in the event has raised to date €762,198. All that was asked of these willing individuals was to ‘give one night to change a lifetime’. This one night gave Jason and Mark an opportunity to help. Hopefully, by sharing their experiences they will have informed others of how much we need to help organisations like Focus Ireland.
We look forward to taking part in ‘Shine A Light’ 2019 and we would encourage other business leaders to do so until this issue for our country is materially resolved! Huge thanks to everyone who donated, every euro makes a difference and your contributions were really appreciated!! Focus Ireland are still taking donations from this event if you wish to help us even further!!!
Before the financial crisis, the credit risk on derivatives were mostly considered insignificant. This was a view that was quickly revised when risks increased and traders started adjusting the values quoted on derivatives from counterparty to counterparty, and so market prices began to diverge.
Derivative valuations adjustments – holistic view
Before the financial crisis the credit risk onderivatives were mostly considered insignificant, – a view that was quickly revised when risks increased and traders started adjusting the values quoted on derivatives from counterparty to counterparty, and so market prices began to diverge. Naturally this evolved into calculating “valuation adjustments” from the mid-market price as part of trading to account for the credit risk of the counterparty with whom you were trading with. The calculation of these adjustments became standard among banks and regulation subsequently required them to be included as part of the fair value of derivatives within financial statements.
More recently, with the introduction of IFRS 13, the concept of “non-performance risk” within fair value was included within the accountancy standards of any corporates who had elected up to IFRS standards. Non-performance risk covers anything that could influence the likelihood of an obligation being fulfilled. For derivatives the credit risk is one of the more prominent nonperformance risks but is not the only risk.
In addition, the methodologies required to quantify such risks are not trivial. In addition to the value of these adjustments significantly impacting the purchase price of a derivative, from banks or counterparties factoring them into the value, on restructure the change in the value of these adjustments can often be the value-driver for the cost borne or savings received e.g. as the new restructured trade may have greater valuations adjustments which would be a cost to the restructure or lesser adjustments which would be a release to the restructure.
This paper aims to summarise the leading valuation adjustment calculation methodology and briefly explain and summarise the key valuation adjustments produced. Core Valuation Adjustments: Credit Valuation Adjustment (CVA)
Download our whitepaper for an introduction to CVA/DVA…
As a borrower it’s helpful to understand the thought process of a lender, and which issues feed into their risk assessment of a specific borrower or project.
Not all lenders are identical in their approach – their relationship managers, analysts and credit sanctioners are human after all and their collective views will combine with the institutional culture to drive the overall approach of the lender. Each lending entity whether an institutional investor or a traditional bank will have its own Higher Education (“HE”) credit policy and that may be influenced by many factors such as:
Its existing exposure to the sector
Current risk assessment of the sector / and the individual borrowing counterparty
Competition for its funding resources (can the lender achieve higher returns in other sectors with similar risk parameters)
Market intelligence, or the performance experience of its own portfolio of investments in HE
Some of the core credit principles remain as fundamental as ever and lenders remain focused on:
An institution’s strategy, financial performance and balance sheet strength, both historic and forecast
Reputation, quality, external measures such as league table positioning, National Student Survey results etc
Quality of management and governance
These aspects whilst critically important are generally well understood and most borrowers will have rehearsed their stories to present a positive credit proposition to lenders. However, it is the external landscape that we believe some lenders are currently considering more closely.
Over the last few months there has been plenty of Higher Education press coverage, most of which has been negative in tone. Whether some of this commentary is justified or purely scaremongering is a decision for the lender to either take note of or ignore. Without doubt though, there is a strong political influence becoming evident across issues such as:
The “Value for Money” debate, student contact time, and Vice Chancellor remuneration
Theresa May announcing a freeze for 2018-19 on UK/EU Undergraduate (UG) fees, and whether these signals the start of a more aggressive policy on UG fee levels
Whether government might introduce a lower cap on fees for lower cost humanities subjects or at least limit the extent to which the Student Loan Company will fund these subjects
The sustainability of the current student loan mechanism and a widely publicised figure of UGs graduating with up to £50,000 of student debt, more students predicted not to fully repay their loans, interest rates of 6%+ on post Sept 2012 student loans.
Concern over recruitment prospects with demographics showing fewer 18-year olds and EU applications declining, the first dip in applications since 2012.
The impact of Brexit, and the uncertainties of a “No deal” scenario on EU staff and students’ status, and EU research funding accepting that many commentators feel that common sense will prevail with a transition period on these issues
USS Pension deficit and the affordability of higher contributions
A revised regulatory position with the passing of the Higher Education and Research Act and the introduction of the Office for Students
Perhaps these points will give further credence to students considering alternatives to the traditional University route post-compulsory education. There seems to be a growing awareness that progression to University is but one of the options available now. It remains true however that the quality of our HE provision in the UK is still strong overall and that many students benefit from a University experience.
UniversitiesUK published their latest Facts and Figures document recently
Overall Student Satisfaction 84%
Recruitment levels from 18-year olds in lower participation areas at record levels
Employment rates and median salaries continue to be higher for graduates
England and Scotland saw an increase in Full Time student recruitment in 2015-16
However, the initial indicators for 2016-17 show there are signs that that these growth trends may be reversing.
During August there was plenty of commentary that HE Institutions were nervous about recruitment, citing the toughest ever student recruitment season. Figures from UCAS, the admissions clearing house, have shown a sharp fall in the number of applications for undergraduate study from UK-based students for the first time since 2012, as the shrinking demographic pool of secondary school leavers has combined with fewer applications from mature and part-time students.
In previous years, applications from EU and non-EU students have been an area of growth. But the Brexit referendum and its associated uncertainty has seen a marked decline in EU applications, despite strenuous efforts by the government and the higher education sector to reassure prospective students that they won’t be affected by any fall-out from the UK leaving the EU.
This represents the first drop in volumes of EU applications over the past decade – a period which has otherwise been marked by steady and substantial growth in EU student applications to British institutions (in sharp contrast to the apparent trend for 2017/18, applications from EU students increased by 7.4% between 2014 and 2015 and then again by another 6% from 2015 and 2016, but EU applications are down 5% for 2017 compared to 2016).
The latest UCAS figures that show the number of people who had applied to UK universities for the coming academic year by the 30 June deadline was 649,700 – compared with 674,890 in 2016.
There have been reductions in applicants from all four countries in the UK for 2017 and the trend reversal can be seen below:
Lenders will be scrutinising these recruitment indicators and the actual performance of individual institutions that they are considering investing into. Lenders will always consider investment opportunities on a case by case basis, historically they may have drawn comfort from the perceived level of government support for the sector and the fact that demand out stripped supply with student numbers historically demonstrating an ever-increasing trend (other than 2012 when the £9,000 tuition fee regime was introduced but even then, application numbers recovered very quickly to pre-2012 levels).
The latest HEFCE Financial health of the higher education sector: 2016-17 to 2019-20 forecasts publication issued in October 2017 commented:
“Our analysis of the sector’s financial results for 2015-16 showed a sound financial position overall. However, there was an increasingly significant variation in the financial performance of individual HEIs, and a widening gap between the lowest- and highest-performing institutions.”
“Sector borrowing [in English Universities] is projected to rise from £8.9 billion at the end of 2015-16 to £11.7 billion by the end of 2019-20. Relative to total income, sector borrowing levels are projected to reach 36.8 per cent by the end of 2018-19, before falling to 35.1 per cent by the end of 2019-20.
“Borrowing levels are expected to exceed liquidity levels in all forecast years, by £577 million at 31 July 2017, increasing significantly to £5 billion at 31 July 2020. While this does not raise an immediate viability concern, the current trajectory of increasing borrowing and reducing liquidity is unsustainable in the long term”
Lenders are looking much more closely at the prospects for individual institutions. It is too early to draw any clear conclusions regarding lender appetite, but we expect lenders to become more selective in the investments that they support and to reflect the potentially higher credit risk in the margins that they charge as well as greater differentiation between the terms provided to different institutions. This, coupled with the anticipated rise in interest rates will put more cost pressures on some Universities.
How can Centrus assist?
Centrus can:
Review existing debt and derivative portfolios to ensure your institution has the optimal funding and interest rate risk management structure, providing advice on restructuring if appropriate
Undertake feasibility studies to ascertain debt capacity, reporting on market appetite and pricing as well as consideration of funding options across different providers of debt in the banking, private placement and public bond markets
Support the feasibility and structuring of financing in relation to specific projects under consideration on a recourse, limited recourse or non-recourse basis
Working with institutions to present their credit profile, organising a funding process and facilitating the execution of a debt transaction either in the bank or the institutional market
Determine accounting impacts, such as hedge accounting costs for a range of options.
For more information, please contact Robert St John, Director – Centrus
Infrastructure investment from the UK is booming as opportunities emerge in sectors such as power and transport, according to the new report by Centrus and Inframation. We’ve surveyed 100 senior-level UK-based direct equity investors in infrastructure, including asset managers, private equity funds, specialist infrastructure funds and pension funds.
This survey is intended to provide further insight into the plans and aspirations of infrastructure sponsors, operating across the sector. As a leading corporate finance advisor to the infrastructure sector, Centrus is playing a key role in shaping the future, and we hope will become a recurrent event, providing a barometer for sentiment and trends.
Centrus acted as funding advisor on eight bond and private placement deals between July 2015 and July 2017, the largest number according to analysis published by Social Housing Magazine. This placed Centrus as #1 funding advisor by number of deals and joint #1 by value of deals advised on.
Following a year when the volume of institutionally funded housing deals nearly doubled, we are very pleased to have worked with so many great clients on a range of ground breaking transactions, providing the investment needed to tackle the UK’s shortage of new housing supply.
Notable transactions included:
Places for People’s £400m 2.875% bonds due 2026 – The largest bond then issued in the housing sector
A2Dominion’s £250m 3.5% bonds due 2028 – The first holdco level bond issued in the housing sector
Welsh Housing Partnership’s £93m private placement with PIC – Financing a unique and innovative structure sponsored by Welsh Government and four leading Welsh housing associations
One Housing Group’s £85m private placement with M&G – Enabling OHG to efficiently finance its shared ownership portfolio
Contact our housing sector specialists for more information on how we can ensure your businesses benefit from the lowest cost of capital possible over the long term.
*Other 7 firms featured in the original survey but none advised on more than 2 transactions
For more information, please contact Phil Jenkins, Managing Director – Centrus
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