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Bond of the Week: 11 September 2014
Bond of the Week : 11 September 2014
The Housing Association (HA) A2 Dominion has returned to the retail bond market for a second issue. Unfortunately the issue has come and gone in the blink of an eye, meaning that by the time you read this it will be too late to put in a new issue order. The bond was announced on the 9th and closed at 9 am on the 10th September which, by quite a margin, is a world record early close for the ORB. I am afraid there was no time for me to crank up my pen and produce a pre-close Bond of the Week.
As well as an indication of investors’ perception of value, the early close I think shows the extent of placing with institutions as opposed to private investors and wealth managers. Institutions are likely to have been made immediately aware of the issue and are programmed to make an instant decision (time is money). While the foreshortened offering period for this AA- top quality issuer may be exceptional, it may nevertheless also indicate that the market, as it becomes more established, is steadily moving to shorter offering periods. This of course will not be to the advantage of private investors making their own decisions.
Although the issue has closed I think it nevertheless worthwhile to have a short write up for the record and for those who may wish to look at it in the secondary market. Here are the terms as published as a new issue.
At the presentation I asked only one question. From a creditor’s perspective has anything meaningful changed since your last issue in October 2013? I got a very clear cut answer: no. I therefore refer you to my Bond of the Week a year ago.
The salient point is that this large AA- rated HA, backed by social housing income and a large property portfolio that is not highly geared and is probably undervalued (certainly if it was sold on the open market) is a good credit and from the perspective of the ORB market a very good credit. Here are a few facts and figures. They are focused entirely in London and the South East. They own or manage 34,800 units (very little of it high rise) across 80 local authorities. 90% of letting revenues and 75% of total revenue are from social housing (ie the government but now coming, post government reforms, via the tenants in order to increase financial responsibility of those in receipt of benefit). The net surplus (profit) for 2014 is £38 million, up 39% on 2013. Value of the stock is £2.3bn (on an Existing use Value (EUV) method).
I think that enough has been said on the credit. The only thing of note to add is to draw attention to the fact that they have no housing anywhere near Scotland. Should that country take the low road and choose independence, none of A2’s assets will be involved in the ensuing financial maelstrom. And should an independent Scotland start where they left off; border raids, sheep rustling and secret alliances with France aimed at the expropriation of English assets, nor does A2 Dominion have any housing up North and within reach. Note by the way that the oil producer Enquest, with the majority of its assets held in Scottish waters, has seen its bond fall 5 points in the last month or so (although there are subsidiary reasons). [At this point I am sure A2 would ask me to say that they as equally welcome investors from North of the border as from the South, or indeed the Isle of Man, Channel Islands, the Rock of Gibraltar, Tristan da Cunha, Pitcairn etc. etc.]
Conclusion: This bond was priced well but being a good credit and so carrying a low coupon your risk is interest rate/ duration risk and that needs to be monitored. A2 has also chosen a maturity which is two years longer than the previous longest issue. I leave you decide what you think about interest rates. I personally don’t see that rates can go up far but then within six months to a year we should see the first rise and it is not clear what the psychological effect of that will be. And then there is the uncertainty of the Scottish vote; but a difficult result could send good quality long dated bonds either way. You may also think at 4 ½% return, just what is the point of a purchase? This will not be the view of institutional investors who need to put money to work in the fixed income market but it may be the view of the private investor. I personally have bought some but I do not expect to be a long term holder. As I sign off, the bond has closed 100.85-101.15 to yield 4 3/8% on the offer; still not a bad return compared with the competition (e.g. Marks and Spencer 4.75% 2025, rated BBB- and offered at 105.90 to yield 4%).
Oliver Butt is a Partner in City and Continental LLP, a leading independent broker in fixed income. The author and or the LLP may hold a position in or trade in any of the securities mentioned above.
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