Download The Retail Bond market continues to present great opportunities for

P R I VA T E I N V E S T O R S N E W S L E T T E R
The Retail Bond market continues to present great
opportunities for investors
Henrietta Podd Evolution Securities
Debt Advice & Advisory
“Profit is a reward for risk” or so I was told at school.
That being the case, the first question investors should ask
must be “is the investment for income, or for growth, or
perhaps both?” Those that answer by saying “income”
typically don’t want too much risk. They may have another part
of their savings in riskier growth orientated products or they
may have no other risk assets at all. Either way some investors
would consider that a balanced investment portfolio will
include a portion of investment into gilts or corporate bonds. A
tradable bond offers regular fixed income and a known maturity
value. Neither of which are available from Unit Trusts or ETF’s.
It is therefore interesting to observe that buyers of the three
most recent Retail Bond launches have all enjoyed a better
performance than would have been the case if shares of the
same company had been bought, although there can be no
guarantees that the future performances will be similar and it
is important for an investor to understand the risks associated
with the investment into bonds. However it is nice to see
that in each case the bonds that were bought for income, not
capital growth, have started life with both! All of the recent
bond issues on the ORB have increased in price despite the
Japanese earthquake, tensions in the Middle East and poor
economic data – all of which have subdued the equity market.
Michael Dyson Evolution Securities
Head of Fixed Income Retail Trading and
Distribution
Some commentators may argue that another feature of
investing is the ability to diversify risk colloquially known as
“not putting all the eggs in one basket” and whilst there are
many secondary issues in existence it is encouraging to see
new names and new sectors coming to market. We recently
saw the launch of a retail bond issue for Places for People –
the first Housing Association to trade on the ORB.. This sector
constitutes one of the highest quality group of credits in the
United Kingdom – outside the British Government although
investors should be aware credit quality can change over time.
Currently housing associations have corporate ratings of A+
to AA, substantial government support and a well established
regulatory regime, with to date strong revenues. As a result
some investors may consider that they outrank the Utility
and Corporate sectors as a safe place to invest. However
to consider bonds like any investment do have underlying
inherent risks which investors should understand before
investing.
Places for People on ORB
Places for People, is a UK housing which recently issued
its first bond for private investors onto the ORB. This
bond is tradable in small denominations and offers a fixed
rate of 5% with a maturity of five years and six months,
therefore making the bond eligible for ISAs and. SIPPS.
The bond is currently Aa3 rated by Moody’s Investor
Services.
4 June 2011 | Private Investors Newsletter | [email protected] | www.londonstockexchange.com
P R I VA T E I N V E S T O R S N E W S L E T T E R
Number of households on Local Authorities waiting list
Background Information on English Housing
Associations
1. An essential service underpinned by excess demand
• Housing associations provide high quality, affordable housing for rent and owner occupation, together with
related social and community support to create cohesive and sustainable neighbourhoods.
• There are over 1,500 housing associations operating in
England, some tracing their origins to the great
philanthropic estates founded in the 19th Century or even
further back. Others were created more recently when local authorities transferred their council housing through large scale voluntary transfers (LSVTs) to newly created housing associations.
• Currently housing associations own and manage approximately 2.5 million social homes in England , representing some 18% of the housing stock, with c. 50% of this accounted for by the top 20 associations .
• There is a current waiting list of c. 1.75 million households for social housing. This has increased by 68% over the last 10 years .
• Although the public sector has announced a reduction in
capital available to build new social homes, the fundamental
requirement for the essential service provided by housing associations underpins their strengths.
Rented Housing in England - Millions of units
4
3
2
1
Housing Association (HA)
Local Authorities (LA)
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
0
Private Rented Sector (PRS)
1 In addition, local authorities own a further c. 2m social homes
2 Moody’s Rating Methodology, English Housing Associations,
September 2010
3 Moody’s Rating Methodology, English Housing Associations,
September 2010
4 Communities and Local Government, Statistics waiting lists as at 1 April 2010 of Local Authorities, 1 December 2010
2,000,000
1,800,000
1,600,000
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
England
2. Private sector flexibility with public sector funding
• Housing associations are highly regulated private sector entities, professionally managed to generate surpluses for reinvestment in their business and not for distribution to shareholders. They are usually registered charities and are generally constituted as Industrial and Provident Societies or companies limited by guarantee.
• They have been the principal means used by the Government over the last 20 years to develop new social housing.
• Apart from capital investment, a substantial portion of social rent is paid by housing benefits.
3. Strong investment grade credit ratings
• As a result of the role played by the sector in delivering
affordable housing, the extensive regulation and the underpinning of its income and investment by public funding, S&P, Moody’s and Fitch assign high investment grade credit ratings to housing associations.
• Currently public credit ratings for individual housing associations issuers are in the A1/A+ to Aa2/AA range and a number of housing associations have issued secured bonds with higher ratings.
• To date, there has been no payment default on any housing association bank loan or bond.
In brief English housing associations are working
within a sector in high demand, developed and backed
by the government, highly rated sector, delivering an
essential community service.
5 June 2011 | Private Investors Newsletter | [email protected] | www.londonstockexchange.com