Category: Market Insight

Market update

• The Bank of England voted 8-1 to hold interest rates at 5%. Sterling strengthen following the decision, and at $1.34 today, is the highest dollar exchange rate since March 2022.
• CPI remains at 2.2% following the August 2024 release, in line with expectations, and the BoE expects CPI at 2.5% by the end of 2024, lower than the previously forecast 2.75%.
• The announcement on 11 September that July GDP growth was flat for a second month in a row led a fall in SONIA swap rates due to the implied economic weakness. The fall has retraced moderately in recent days.
• The 10-year swap rate at c. 3.5% is down 0.6% from a year ago, while the 30-year gilt has dropped 0.2% in that time to 4.5%.

Implications for clients

• The sector faces c. £10b of debt maturities in 2024/25 and 2025/26, in addition to c. £11b of new funding over that time. The rise in popularity of shorter tenor bank funding in recent years is driving an increase in debt maturities.
• With gilt yields rising relatively steeply from 10 years (3.9%) to 30 years (4.5%) and the 10-year swap trading at an attractive 3.5%, funding strategies require careful thought and execution. The banking market is currently a popular solution to capitalise on the lower swap curve.
• However, covenant light debt capital market (DCM) solutions will be required over the coming years due to the need for deeper liquidity pools to meet the higher quantum of funding. Shorter tenor DCM solutions are rising in popularity to avoid the current steep gilt yield increase at the longer end.
• The outlook for CPI has shifted moderately lower, helped by sterling strengthening which eases import costs. For business planning assumptions, September CPI for this year and beyond is not expected to deviate materially from the 2% long term target. Our latest guidance is 2.2% for September 2024 and 2.1% for September 2025.
• With SONIA expectations falling further, headroom in 2024 business plans has continued to improve.

Recent client activity

At Centrus, we are dedicated to providing strategic financial solutions and support to our clients. Our recent activities include:

Portfolio Restructure: Centrus arranged £70m of new funding for Hafod and advised a £90m portfolio restructure.

Market Update: If you missed our 2024 Affordable Housing Seminar last week, please join us at our Webinar for a summary of the event, more details on the timing of this to follow. We will run through topics including recent sector financial performance and activities such as mergers and stock disposals, the challenge of the existing funding model for some Housing Associations and the wider funding landscape.

To learn more about our work in the affordable housing sector, click here.

For more information, please contact Paul Stevens or John Tattersall.

Market update

• The new Planning and Infrastructure Bill, announced on Wednesday, aims to simplify the planning consent process and significant changes to the National Planning Policy Framework are expected later this month. Changes will take time to implement, and there will continue to be planning and supply bottlenecks, but the ambition and drive for new housing supply is likely to have an impact on Housing Association balance sheets later this decade.
• Real wage growth is 3.7%, and service inflation remains at 5.7%, indicating resilience in the UK economy. Both metrics will need to fall for interest rate cuts to begin. We haven’t seen material real wage growth sustained for more than a year since the early 2000s.
• The 5-year swap rate has decoupled marginally and is no longer above the 20-year rate. This is the first sign of the yield curve inversion reversing.
• The key messages on swaps are a flat curve across tenors with a c. 10 bps range between 5 and 20 years, and low volatility with a change in economic data required to see a meaningful fall in rates.
• Movements in 3-month SONIA projections have tempered recently, compared to earlier in 2024, a sign of increasing stability. One rate cut is expected in 2024, and three by summer 2025.

Implications for clients

• Unless the economy shows signs of weakness and real wage growth falls back materially, it is difficult to visualise a meaningfully lower swap curve. The current 10-year swap rate of c. 3.8% is an attractive entry point at the lower end of the 2024 range, with limited signs of a fundamental shift.
• With the 30-year gilt rate at c. 4.5% and spreads almost at record lows, longer dated and covenant light DCM notes offer good value. Investor demand is driving availability and value of innovative solutions such as variable to fix or shelf facilities.
• The general sense of stability combined with tight margins and spreads makes now a good time to lock in capital.

Recent client activity

At Centrus, we are dedicated to providing strategic financial solutions and support to our clients. Our recent activities include:

Portfolio Restructure: Centrus led the successful restructuring of Jigsaw’s portfolio by removing MRI, including from a Private Placement. This initiative increased liquidity and significantly eased financial support and merger controls.

Portfolio Restructure: We secured £175m in new facilities and restructured £195m of existing ones for Cottsway. This comprehensive refinancing, which included a £75m new private placement, resulted in substantial interest savings, harmonized covenants, and reduced treasury risks.

Portfolio Restructure: Centrus guided Hafod Housing through a £90m portfolio restructure and secured £70m in new funding. We identified the optimal funding solution and executed the strategy, ensuring efficient financial management and stability for Hafod Housing.

To learn more about our work in the affordable housing sector, click here.

For more information, please contact Paul Stevens or John Tattersall.

Market update

• The wait for CPI to fall to target is over, with the May 2% result meeting economist expectations. Will CPI hold at this level, will we now see interest rate cuts?
• Higher than expected service inflation (5.7%) led the market to dial back bets on interest rate cuts in 2024. The service economy continues to resist higher interest rates and until there is a meaningful change in this trend, interest rate cuts will likely be delayed.
• The market expectation for SONIA in 2025/26 and 2026/27 is 10 bps and 20 bps lower than a month ago respectively. It is higher for longer in 2024, with a steep fall priced in through 2025 to c. 4% later in 2026.
• Swap and gilt curves for 10 and 30 year are down 25 and 20 bps respectively on a month ago. Gilt yields combined with tight spreads look appealing, despite a c. 10 bps tick up in spreads from the lows a month ago.

Implications for clients

• We may wait a little longer for the first rate cut but there is a little more headroom in June business plans with forward SONIA down for 2025/26 and 2026/27. Locking in that fall could be attractive unless hedging ratios are already at the upper end of policy range.
• Bookrunners continue to suggest modest premium on sub-benchmark issuance for good credit, and investor demand for medium-term notes is more than sufficient to meet supply leading to attractive spreads. Housing Associations have a wide range of DCM funding options, and an unusually low cost of carry thanks to high short-term rates.
• With the election looming there is a chance of domestically driven volatility. The global financial system continues to adjust to higher bond yields and there is always a chance of further shocks as we saw in 2023 with the various bank failures. It makes a lot of sense for Housing Associations to avoid delay in locking in cost of capital and funding for fresh investment plans.

Recent client activity

At Centrus, we are actively developing hedging strategies and participating in business planning and assurance engagements for our housing clients. Recent activities include:

1. Business planning and assurance engagements: Centrus recently worked with Capital Letters, providing their Board with confidence and assurance that their business plan was founded on informed assumptions and driven by a best-in-class model.
2. Investment policy reviews: Investment policy reviews are a recent common trend, with a focus for some of the best way to look after significant chunks of cash post asset disposal or capital raise. Beyond paying down RCF, we have focussed on money market funds.

To learn more about our work in the affordable housing sector, click here.

For more information, please contact Paul Stevens or John Tattersall.

Market update

• We had farcical scenes at 10 Downing St this week as Rishi Sunak’s election announcement was drowned out by the pouring rain and a protester blasting out D:Ream Things Can Only Get Better!
• The Government has solved inflation, masterful, I wonder if Brian Cox could write us a song about that…
• Paul Krugman, a distinguished Professor and Nobel Prize winner said, “On interest rates, I am actually fanatically confused”. He commented on the long period of low interest rates that we thought was grounded on fundamentals, and now a period of high interest rates with the economy remarkably robust. Has the long-term sustainable interest rate gone up?
• Within the April 2.3% CPI result (2.1% was expected) is notably higher service inflation (5.9%) and core inflation (3.9%) than a Reuters poll forecast (5.5% and 3.6% respectively).
• The UK economy, largely services driven, is proving resilient to higher interest rates, and the April inflation results sparked a rally in sterling and revised projections of rate cuts, with the chance of a June cut now below 20%.

Implications for clients

Expectations on timing of the elusive first cut have bounced around in recent months and the 3-month forward SONIA curve for 2025/26 is c. 15bps higher than it was a month ago. But looking out 2 or 3 years, the curve hasn’t really moved so variable base rate assumptions in prudent financial plans are unlikely to need knee jerk review.   

Longer term rates remain stable and are beginning to look stubbornly static at c.4% on the 10-year swap and c.4.6-4.7% on the 30-year gilt. Our recent development assumptions survey showed clients using an average 5.3% discount rate, having crept up from sub 5%. Expectation that the cost of long-term capital will fall materially appears to be waning.     

The relatively insatiable investor demand and falling HA bond spreads has helped offset gilts, and issuances from Clarion, Platform and Paradigm in the 5.3% to 5.4% coupon range is cause for optimism. Bookrunners are suggesting modest premium on sub benchmark issuance for good credit, highlighting the variety of DCM funding options currently available to HAs, and an unusually low cost of carry thanks to high short-term rates is another factor to consider.     

Recent client activity

1. Tai Tarian refinance: Tai Tarian completed a £95m full re-finance. This involved two new bank funders and a PP investor, all on terms reflective of Tai Tarian’s high credit quality. The refinance will drive a substantial £6m NPV benefit, significantly reducing WACC, optimising financial covenants and corporate controls, and enhancing debt capacity and operational flexibility. Despite current rates, this transaction highlights opportunities to refinance debt and deliver a positive impact.

2. Strategic advisory: We continue to advise on strategic asset disposals and acquisition strategies, highlighting the sophisticated approaches some HAs are exploring to unlock capacity.

3. Risk management: Hedging strategies and interest rate risk management continue to be areas in which we are helping clients.

To learn more about our work in the affordable housing sector, click here.

For more information, please contact Paul Stevens or John Tattersall.