The UK government announced in its Budget earlier this month that from April 2015 it planned to let people enrolled in defined contribution pension schemes to access their savings as they wished, meaning no need to purchase an annuity, and a shake-up of the sterling markets "natural long end bid".
Pension funds have been main buyers of housing associations, in private placement form and elsewhere. The investors understood the sector was government-regulated (and almost government-backed) and so were keen to take the bonds at a spread to Gilts.
The issuers have been keen to print private placements, and the market is still a good option, but sterling demand could dwindle as fewer people opt to buy annuities. As that happens, issuers will want to open alternative funding sources.
One issuer, Places for People, has already led the way. It printed the first bond from a UK housing association in euros — a €40m 3.11% 10 year — on April 7.
The deal took some work, but once investors understood housing associations and the connection to the government they were keen to buy the highly-rated paper.
Now Places for People’s peers should follow.
European private placement investors are scrambling for anything different. Most of the regular borrowers are already posting tight levels so investors are willing to pay up for diversity.
The borrowers will need to swap their funding back into sterling. But the euro/sterling swap rate is pretty flat. It’s a good time to test the waters. There will be extra expenses and the borrowers will need to manage the risks of market-to-market movements on the swap, but with the UK investor base set to dwindle, funding diversification is worth a shot.