The Bank of England (BoE) has been urged to include housing association issuance in a major bond-buying programme, launched last week in a package of emergency measures aimed at stabilising the markets amid the coronavirus crisis.
A hefty injection of quantitative easing (QE) was signed off by chancellor Rishi Sunak last week amid unprecedented volatility in the capital markets, which were shut to new deals for longer than a week before two major issues on Friday (20 March 2020) by Unilever and Engie, raising €4.5bn between them and reportedly heavily oversubscribed.
As part of the government’s multibillion-pound emergency programme to support the UK economy, the BoE is increasing its corporate bond-buying initiative by £200bn, from £445bn to £645bn.
The QE programme by the BoE – joining the European Central Bank (ECB) and the Federal Reserve with monetary interventions – is aimed at stabilising the markets and the broader economy following both bond and equities sell-offs amid a confidence crisis and investor fears around risk.
The BoE – which also cut interest rates by 15 basis points to 0.1 per cent – said it will publish details of its intended purchases of corporate bonds in coming weeks. Housing associations would find out at that point whether their bonds are included.
Reuters reported that 24 companies are being listed under the scheme and a similar programme by the ECB.
The Federal Reserve went even further today (Monday 23 March 2020) by committing to unlimited purchases of US treasuries and agency mortgage-backed securities.
Bond-buying in 2016
The BoE launched a £10bn corporate bond-buying programme in 2016, focusing on government and sterling investment-grade bonds issued by firms making a ‘material’ contribution to the UK economy.
The aim is to trigger monetary stimulus by lowering the yields on corporate bonds and reducing the cost of borrowing for companies “by triggering portfolio rebalancing into riskier assets by sellers of assets and by stimulating new issuance of corporate bonds”.
It saw the inclusion of housing association paper following lobbying by the National Housing Federation, and included issuance by L&Q, A2Dominion, Notting Hill (now Notting Hill Genesis), Amicus Horizon (now Optivo), Sanctuary, Affinity Sutton (now Clarion), Peabody, Guinness, Sovereign, Riverside, Together, Midland Heart and Wheatley Group.
The hope was that it would mean cheaper pricing for housing associations, but some investors suggested there would be little incentive to sell quality, long-dated paper that already matches their pension fund liabilities.
A bookrunner for a bond issued by A2Dominion around the time said the impact had been “at the fringes”, however there have been suggestions that the housing association bond market might benefit from having a higher profile today than it did three years ago.
Piers Williamson, chief executive of The Housing Finance Corporation – the sector’s long-standing bond aggregator, said this week: “If it works like last time, we would expect a number of single-name HA borrowers to be in the programme.
“In the short term, the market volatility far outweighs the potential benefit. But over time, the programme as a whole will be seen as a good thing to help stabilise volatility.”
Paul Hackett, chief executive of Optivo, urged the BoE to buy housing association bonds and for the UK government to offer further debt guarantees to help boost investment and growth.
He told Social Housing that the precedent was set following the 2016 bond-buying programme. He said: “It would help the sector with pricing; it will reduce spreads, and that will be good news for HA issuers.”
Optivo completed an investor roadshow almost a fortnight ago with a view to a £250m own-name bond to support its development programme, but said it is taking a “wait and see” approach to its issuance with no immediate need for liquidity.
Mr Hackett said that Optivo is still “looking for the right window to issue”.
He added: “We are in a great position with investors and banks. It’s just about finding the right time.”
Mr Williamson added: “In the short term, everybody’s spreads have leapt out. The sterling market is a bit of a no-go area at the moment. But this isn’t going to go on forever.”
The Ministry of Housing, Communities and Local Government had already been considering bids for a delivery partner contract to deliver a potential £6bn Affordable Homes Guarantee Scheme, scheduled to get under way later this year.
At the weekend, the Financial Conduct Authority wrote to all listed firms asking for a two-week moratorium on reporting their financial results to the markets, to prevent investors acting on out-of-date information.
In recent years, some housing associations with pubic bonds have also provided financial updates to the markets.
Already have an account? Click here to manage your newsletters