Places for People issues sector's biggest HA bond as BoE action pushes gilt yields to new lows

The deal was understood to be more than three-times oversubscribed by investors, with an order book of £1.3bn.

Click here for a list of HA bonds

Places for People (PfP) - which owns or manages 150,000 homes and has a range of businesses including affordable housing, managing property, leisure centres and retirement housing, construction and energy services - had undertaken an investor roadshow a fortnight ago, with plans to issue £300m, before taking advantage of the latest fall in gilt yields on the back of the Bank of England’s (BoE’s) efforts to stimulate the economy with a new monetary package.

The £400m of bonds priced at 225 basis points over the reference gilt. The 10-year gilt was 0.632 per cent at the time of issuance. It fell to a reported low of 0.541, compared with 1.4 per cent before the Brexit vote.

Royal Bank of Scotland, HSBC and Barclays acted as bookrunners on the transaction. Centrus were PfP’s advisers.

Despite tighter spreads in the past, PfP’s previous wholesale and retail fixed rate bonds have had coupons of 5 per cent or more. PfP’s existing bonds were sitting at around 160-170 bps over gilts towards the end of July 2016.

L&Q was the last association to issue a 10-year bond, secured against assets and issued in April 2016 at a spread of 107bps and coupon of 2.625 per cent.

PfP’s wider spread comes as UK government bonds, or gilts - over which housing association bonds are priced - fell to record lows, as the BoE attempted to launch an economic stimulus package in response to the fallout of the vote to leave the European Union.

Bond yields have been in freefall since the Brexit vote and following concerns over an economic slowdown in China, with ever-increasing demand for safer investments as riskier equities tumble.

A number of housing associations have been taking advantage of the fall in bond yields, from government-guaranteed Affordable Housing Finance selling £191m at an all-in rate of 1.989 and spread of 41bps, to the likes of Orbit Group and Swan Housing selling retained bonds at 3.081 per cent and 3.3 per cent respectively.

Economic backdrop

The last week had already seen a string of sterling corporate and bank bond issuance before the impacts of the BoE’s actions were seen in two issuances by Vodafone, which issued 40-year debt at a cheaper level than shorter-dated bonds it had sold days before.

Some yields on government debt even fell into negative territory yesterday amid increased demand.

The BoE’s four-pronged stimulus programme included cutting the base rate by 25 basis points to 0.25 per cent, extending its quantitative easing (QE) programme by £60bn over the next six months, ‘printing money’ with which it can buy government bonds and boost the economy. It also included purchasing up to £10bn of UK corporate bonds and a new Term Funding Scheme, which encourages banks to pass low rates to borrowers.

While the BoE saw appetite from investors to sell short and medium-term bonds, it fell short on initial efforts to buy back £1.17bn of long-dated government bonds from ‘buy and hold’ pension fund and insurance company investors on Tuesday (9 August 2016), attracting offers of £1.11bn.

That represented the first time the BoE could not find sellers since it started buying government bonds in 2009, and appeared to send long-dated gilt yields to new, record lows.

There have since been suggestions that the BoE could buy up some government-backed and individual housing association bonds. The next BoE approach for long-term gilts is reportedly expected to be on 16 August 2016.

PfP credit

PfP’s unsecured bonds mature on 17 August 2026 and were issued by Places for People Treasury, a new treasury vehicle that was created in the last year to raise funding for its registered providers.

The group issues through its European Medium-Term Note (EMTN) programme, which has risen to over £1bn.

PfP is rated A3 by Moody’s and A+ by Standard & Poor’s, both with a negative outlook.

It was the only English housing association to avoid a ratings downgrade by Standard & Poor’s earlier this month.

However, Moody’s downgraded PfP before it went on an investor roadshow in July 2016, citing the level of diversification in the group’s business operations and refinancing risk.

Places for People has a range of businesses beyond housing for social rent, such as managing property, leisure centres and retirement housing, construction and energy services.These activities form more than half of its turnover but only 17.5 per cent of its operating profit.

The ratings agency said the group made 56 per cent of its turnover from non-social housing letting activities in 2016 and this was projected to rise to 64 per cent in 2018, compared to a peer average of 27 per cent in 2015.

The treasury vehicle will not do any on-lending to commercial subsidiaries in the group, instead serving four affordable housing entities Places for People Homes, Places for People Living+, Cotman and Castle Rock Edinvar.

Three of those - Places for People Homes, Places for People Living+, Cotman Housing Association - acted as guarantors on the unsecured bonds.