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Should You Take A Punt On A 6Pc Retail Bond?

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http://www.telegraph.co.uk/finance/personalfinance/investing/10162370/Should-you-take-a-punt-on-a-6pc-retail-bond.html

A family-owned enterprise letting commercial properties in Manchester, Liverpool, Leeds and Birmingham is the latest institution seeking to borrow from private investors, offering a mouth-watering rate of interest in return.

Bruntwood, which was founded in 1976 and owns 110 properties worth almost £1bn, will pay 6pc a year on minimum investments of £2,000. Investors' capital will be repaid in 2020, meaning the bonds run for a sufficiently long term to be held with an Isa or Sipp, so income can be paid tax-free.

Potential investors can subscribe via their stockbroker until July 17. The bonds will be quoted on the London Stock Exchange shortly after this date, where they should be able to be traded in future, provided that a market of both buyers and sellers develops.

Is your mouth watering?

In 2020 you get your money back providing the economy hasn't tanked?

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Even RBS said no.

http://www.costar.co...-bank-revolver/

RBS has stepped aside as loan servicer, to allow Bruntwood and Cairn Capital to call a special resolution at an EGM on Tuesday 19 February 2013.

Bruntwood has 100% support of an Ad-Hoc committee of bondholders which represent 72% of all bondholders.

“The Bruntwood Group is seeking an early partial refinancing to mitigate the risk posed by the concurrent maturity of its debt and to provide certainty over the future financing of the Bruntwood Group,” wrote Chris Oglesby, chief executive officer at Bruntwood Group in the proposal to bondholders.

Over the course of the two-year extension, Bruntwood Group intends to de-leverage its property portfolio.

Edited by Secure Tenant

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There's nothing unusual about issuing a bond, and 6% is in line with many bonds on the market. Companies of a certain size do it because it's cheap finance - cheaper than a bank loan - if they can get a good-enough credit rating. Investors invest because they get a better rate than a bank deposit and much lower volatility than equity. Many hold for the lifetime of the bond, to secure a fixed income.

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There's nothing unusual about issuing a bond, and 6% is in line with many bonds on the market. Companies of a certain size do it because it's cheap finance - cheaper than a bank loan - if they can get a good-enough credit rating. Investors invest because they get a better rate than a bank deposit and much lower volatility than equity. Many hold for the lifetime of the bond, to secure a fixed income.

Not really cheap at 6% but it is about certainty. Banks can call in revolving loans while bondholders just have to wait until 2020. Banks also want specific securities.

At this rate, I think these are not senior secure bond - it just ranks before ordinary creditors but after banks and lenders with specific charge on properties.

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They own one-third of the office space in Manchester city centre and also donate 10% of all annual profits to arts, cultural and community charities.

http://en.wikipedia.org/wiki/Bruntwood

Family owned company lol.

Sure.. I really want to help maintain the old ways, and keep rents high, and a high proportion of assets with one single participant who is looking for funding.

Got more peace of mind with 1% on my savings, and by my way of thinking, a better return, or at least more options when value returns to the market.

Perhaps there is some value out there, but not sure it's being market to value on some com-prop owners books. Only when it comes to sell, maybe. Gary Neville could have got price value in his latest purchase. He's sure getting involved in property, whereas I'm negative outlook for hotels and restaurants.

And Neville looks to have bagged a bargain after the Grade II stock exchange building's price was slashed from when it previously changed hands.Previous owners MCR Property Group put it on the market last December for £1.5m - a fraction of the price it last sold for in 2004 when it was valued at £4.7M.

http://www.mancheste...ar-gary-1761587

Edited by Venger

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There's nothing unusual about issuing a bond, and 6% is in line with many bonds on the market... (SNIP)

Actually, IMO there is plenty that is worth talking about here.

Because of the February 2010 creation of the Order Book for Retail Bonds (ORB) by the London Stock Exchange, we can have a look at who has been tapping this market for finance.

This page from the LSE website suggests that there were 16 issues last year and there have been 5 completed so far this year with 2 open.

Of the seven issues this year, EnQuest plc in February are in oil and gas production. The others are property (Bruntwood and Helical Bar), specialist mortgage lending (Paragon), building materials (Grafton Group) or pay-day loans (Provident Financial and International Personal Finance, who are my personal favourite; they issue retail bonds in the UK so that they can provide "home credit" in Poland, Slovakia, Mexico and Romania, now that's putting your money to work!).

Plenty of property outfits last year too; Unite Group (student housing), St Modwen (property development on brownfield), CLS (commerical property investment) Places for People (which is apparently a housing association really) and Primary Health Properties (who knew such a think existed!!!) and if you want a laugh, open their websitewith the sound turned up, when I open the site in my browser I get a choir of different audio streams reassuring me about their financial strength.

The other thing that Porca missing is that these bond issues by the property companies are pretty small, (about £65m to £80m) where the London Stock exchange issue was £300m, National Grid was £285.5m, Tesco Personal Finance was £200m and HSBC was £196m. Presumably, in order to make this kind of funding cheaper than a loan from a bank who is confident about your creditworthiness, you'd need to fill your boots.

God knows what is really going on. My guess would be that it was a symptom of the post financial crisis world. You have banks trying to reduce their exposure to property companies, pushing those companies to seek alternative forms of finance, and retail investors fed up with 2% being more willing to forego the deposit insurance and take some risk in order to get 6%. It'll be interesting to see if there are any defaults on these bonds in the next couple of years. Again, I would assume that there will be.

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Places for People turn out to be quite an interesting bunch, this cracking little piece from Inside Housing in September 2010 points out how sweet a deal the housing associations have had:

Heading the list is Jane Ashcroft, chief executive of Anchor Trust. Like her predecessor John Belcher last year, she was the sector’s highest earner in the financial year 2009/10 with a total package of £290,000 - more than twice as much as Mr Cameron. David Bennett, chief executive of Sanctuary Group, takes the second spot on £285,446, swapping places with last year’s number two, David Cowans. The Places for People chief takes a not-too-distant third place this year with £279,095.

In the 2011 Financial Statement for the group we get this cheeky little paragraph on Directors' Emoluments, (Note 5).

The ultimate Group parent, the Places for People Group (the Group) has determined that subsidiary governance is achieved through functional management arrangements and the Assurance & Regulation Board.

The Group has created posts for functional managers, whose responsibilities may cover more than one group member.

Board Members emoluments during the year were met by Places for People Group Ltd.

Included within operating costs is a share of the salary costs of the Board Members.

Presumably the disclosure requirements then changed because in the 2012 Financial Statements we get, (Note 5 again):

Highest paid director:

Aggregate emoluments (excluding pension contributions) paid to the Group Chief Executive

2012 £372k

2011 £364k

The Group Chief Executive is an ordinary member of the Group’s pension scheme, and does not receive any enhanced or special terms or contributions to any individual pension arrangement.

Defined benefit pension scheme:

Accrued pension at end of year £60,000

Accrued lump sum at end of year £55,000

I find it astonishing that somebody running a housing association can make over £350k.

What's more weird is that this is notionally an outfit with almost £2bn pounds worth of property and they are issuing £40m of RPI + 1% bonds.

Surely, they ought to be able to find that kind of money in their back pocket?

The 2012 Consolidated P&L says (all £ 000s):

Turnover 369,457

Cost of sales (83,056)

Operating costs (190,188)

Operating profit before interest 96,213

Share of operating loss on joint venture (20)

Profit on sale of fixed assets 3,999

Interest receivable and similar income 3,531

Interest payable and similar charges (86,333)

Profit on ordinary activities before taxation 17,390

Taxation 1,496

Profit on ordinary activities after taxation 18,886

The STRGL has some more bad news for Places for People fans:

Consolidated Statement of Total Recognised Gains and Losses

For the year ending 31 March 2012

Profit for the financial year 18,886

Actuarial (loss)/gain recognised in the pension scheme (9,084)

Deferred tax arising on (loss)/gain in the pension scheme 1,108

Fair value (loss)/gain on interest rate and currency swaps (14,905)

Deferred tax arising on (loss)/gain on interest rate and currency swaps 3,547

Expenditure from restricted reserves (2)

Unrealised (loss)/gain on revaluation of investments (10)

Total recognised gains and losses for the year (460)

Prior year adjustment

Total recognised gains and losses since the last report (460)

I'd love to know what's up with that fair value loss on swaps is all about. That and that pension scheme loss, if crystallized, would wipe out the profits.

Porca - you are David Cowans, Chief Executive of Places for People, and I claim my prize.

In other news, does this tie in with the story in the FT, being discussed on this thread? Is it all going a bit tits up at the housing associations? Those directors' emoluments suggest that we could have a UK version of the 1980s crisis in the US thrifts. People helping themselves to the goodies without a care in the world don't always do the best job about worrying about clouds on the horizon and minding the shop.

[Edit: typo]

Edited by ChairmanOfTheBored

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The thick plottens, as they say, courtesy of a reference from the wikipedia entry to a website called "Public Finance", source.

Social landlord bypasses banks to provide 100% mortgages

By Neil Merrick

29 June 2009

A housing association is to bypass high-street lenders by offering its own mortgages at a new housing development in Milton Keynes.

Places for People, one of England’s largest registered social landlords, has become so disillusioned with banks’ lending policies that it is set to provide mortgages to first-time buyers – in some cases at 100% of the selling price.

You build the houses, you then sell them to people but you finance the sale. What could possibly go wrong.

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The thick plottens, as they say, courtesy of a reference from the wikipedia entry to a website called "Public Finance", source.

You build the houses, you then sell them to people but you finance the sale. What could possibly go wrong.

That depends. Car companies do that a lot.

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That depends. Car companies do that a lot.

..through a regulated financial subsidiary.

A PfP spokesman said it would build on its experience of offering loans with the Co-Operative Bank for ‘Ownhome’, another scheme for first-time buyers. Households requesting 100% mortgages would be assessed thoroughly for their ability to pay.

‘We will look at this in a financially responsible manner,’ he added.

Oh dear. Even the Co-op said "no more! " :lol::blink:

Edited by Secure Tenant

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That depends. Car companies do that a lot.

The comparison is interesting. Last time I saw figures, the financing side of most automotive manufacturers was where they made/declared most of their profits.

I think the subtlety that it is important not to overlook is that the comparison is actually of two things that are very different. If we reorganised the market for private cars so that you needed "car owning permission" and set up the "car owning permission planning" function of government so that it was very difficult for a private individual to negotiate and also allowed the car manufacturers to package the car owning permission and the car together in the sale, I'm pretty sure that you'd see pretty rampant Car Price Inflation.

Given that UK house building is such a cartel, the fact that Places for People may be having to finance some their own sales (by taking on risks that the retail banks are unwilling to take) in order generate some of their profits is IMO pretty damn striking.

Returning to the real world, let's then imagine that you have to finance your car purchase, (because you don't have the readies on hand or the earnings to buy it out of savings or disposable income). Assume also that you don't have to finance your car purchase through the car manufacturer, but you could if you choose to take out a personal loan from a bank to cover the purchase.

The apparent analogy between the car financing as it is now and the housing financing as it is now breaks down, because what caught my eye is that whilst I can get a 100% personal loan for a purchase car from a bank, I can't get a 100% for a house regardless of my willingness to sign up for a punishing interest rate. Essentially the banks are saying that when we look in the round at house prices and earnings, the risks of financing to the tune of 100% LTV (from the banks perspective) are too great. However, the housing association is willing to tolerate those risks.

Why the difference in opinion? Presumably, if the housing association cannot sell at the intended price, then it must recognise the loss (or reduced profit) immediately when it sells at a lower price. If however it finances the sale it may still lose one way or another eventually, (if the banks assessment of the totality of the risks is actually correct), but it won't lose today, so David Cowans can keep on helping himself to a cool £370k pa until the game is up.

What really interests me is the way that it suggests that the banks are still trying to reduce their exposure to UK property. They didn't really fight off the end of IO lending - most of the protesting seemed to come from the CML, (and that could have been the machinations of the specialist lenders who were most badly affected) and builder-backed politicians like Grant Shapps. The banks are clearly still leery of high-LTV lending against residential property, and as this suggests, they aren't falling over themselves to lend money cheaply to one of the biggest housing associations.

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Yes.. i suppoe car market is more global but land and house are not. But that still depends on the quality of borrowers and whether they are home owners with a stake and equity or flippers/speculator. Not exactly like for like but berkshire clayton home too has very low default rates on depreciating mobile home loans.

The comparison is interesting. Last time I saw figures, the financing side of most automotive manufacturers was where they made/declared most of their profits.

I think the subtlety that it is important not to overlook is that the comparison is actually of two things that are very different. If we reorganised the market for private cars so that you needed "car owning permission" and set up the "car owning permission planning" function of government so that it was very difficult for a private individual to negotiate and also allowed the car manufacturers to package the car owning permission and the car together in the sale, I'm pretty sure that you'd see pretty rampant Car Price Inflation.

Given that UK house building is such a cartel, the fact that Places for People may be having to finance some their own sales (by taking on risks that the retail banks are unwilling to take) in order generate some of their profits is IMO pretty damn striking.

Returning to the real world, let's then imagine that you have to finance your car purchase, (because you don't have the readies on hand or the earnings to buy it out of savings or disposable income). Assume also that you don't have to finance your car purchase through the car manufacturer, but you could if you choose to take out a personal loan from a bank to cover the purchase.

The apparent analogy between the car financing as it is now and the housing financing as it is now breaks down, because what caught my eye is that whilst I can get a 100% personal loan for a purchase car from a bank, I can't get a 100% for a house regardless of my willingness to sign up for a punishing interest rate. Essentially the banks are saying that when we look in the round at house prices and earnings, the risks of financing to the tune of 100% LTV (from the banks perspective) are too great. However, the housing association is willing to tolerate those risks.

Why the difference in opinion? Presumably, if the housing association cannot sell at the intended price, then it must recognise the loss (or reduced profit) immediately when it sells at a lower price. If however it finances the sale it may still lose one way or another eventually, (if the banks assessment of the totality of the risks is actually correct), but it won't lose today, so David Cowans can keep on helping himself to a cool £370k pa until the game is up.

What really interests me is the way that it suggests that the banks are still trying to reduce their exposure to UK property. They didn't really fight off the end of IO lending - most of the protesting seemed to come from the CML, (and that could have been the machinations of the specialist lenders who were most badly affected) and builder-backed politicians like Grant Shapps. The banks are clearly still leery of high-LTV lending against residential property, and as this suggests, they aren't falling over themselves to lend money cheaply to one of the biggest housing associations.

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Yes.. i suppoe car market is more global but land and house are not. But that still depends on the quality of borrowers and whether they are home owners with a stake and equity or flippers/speculator. Not exactly like for like but berkshire clayton home too has very low default rates on depreciating mobile home loans.

My throw away line should have been "You build the houses, you then sell them to people but you are only one willing to finance the sale. What could possibly go wrong."

Talking about the relative merits of the seller financing the purchase in different contexts is a bit of a distraction. What matters is, just like with the cartel builders, you have someone building houses, but unwilling or unable to sell them at prices that the banks think that buyers can afford, which is so bonkers that it's only the fact that we're so used to it that means we don't remark on it more.

As the biggest cost to the builders is the cost of land with planning permission it must essentially mean that we've created a position wherein the price we allow to be set as the price for land with planning permission is actually higher than the price we can afford to pay for it, and if that doesn't speak plainly to the fact that the market is totally broken, then nothing does!

What appears to be escaping the notice of hoi polloi is that as per the MaketTicker piece, It's Simple: Adjust Your Expectations Or Die, quoted on the gilts thread (H/T Executive Sadman and Secure Tenant) during the boom we moved from a model where we priced things bought by individuals on the basis of debts being repaid during a portion of their working life (about 20 years) to a model where we priced things on the basis of those debts being rolled over. The key difference is that people die and institutions don't, so the "roller-over debt" model is fine for banks and widget makers, but terrible for an individual.

What concerns me about the UK, is given our complete acquiescence whilst this happened, (Christ, who am I trying to kid, it was worse than acquiescence, plenty of mortgaged owner occupiers and BTLers were certain that rampant HPI was the best thing that ever happened to anyone), and our collective failure to even understand what happened 6 years later after it killed the banks put government finances into continuing crisis mode, I'm starting to wonder whether people will ever work it out in sufficient numbers for there to be a political reckoning for the bubble worth factoring into an assessment of what happens next and when. I used to be more convinced that they would, but looking at abominations like Places for People makes me think that we're a more crooked bunch than I ever really thought, and that too many people who do work it out take that knowledge and just make sure that they are doing their share of the leeching off others.

To put it another way, I'm starting to be more convinced that only when policy tools like QE fail or get out of control and gilt yields take off, will there be a transition to something different, (and perhaps more equitable). In the meantime, we'll just have some vulgar inversion of pass the parcel with the losses, with the government and banks as collaborators and opponents trying to off load as much of the losses as they can onto third parties, each constantly eyeing the other suspiciously to make sure that none of the losses actually are being routed back to them through some cunning ruse on the part of the other.

Places for People appear to be getting called out by the banks twice over. Firstly, they are having to provide the mortgages 100% that banks won't, (presumably because the banks think that house prices may fall, and that banks would rather that Places for People were stuck with the losses, thank you). Secondly, they are having to go to retail investors to raise £40m, which seems like a lot of effort. Essentially, if Places for People want rid of the parcel, they'll need to find a mug investor, or wannabe owner-occupier.

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Places for People appear to be getting called out by the banks twice over. Firstly, they are having to provide the mortgages 100% that banks won't, (presumably because the banks think that house prices may fall, and that banks would rather that Places for People were stuck with the losses, thank you). Secondly, they are having to go to retail investors to raise £40m, which seems like a lot of effort. Essentially, if Places for People want rid of the parcel, they'll need to find a mug investor, or wannabe owner-occupier.

I doubt Places for People will be alone.

There is another thread on this but firms are registering as social landlords so they can extract value from it and play `pass the parcel` when it blows up.

http://www.ft.com/cm...l#axzz2YHjefSDH

Or Google "Private Landlords Seek Level Playing Field In Social Housing"

The reforms in social housing are not really about providing "places for people" but management extracting the equity in excessive remuneration, bonuses and pensions. We will probably just sit back and allow it to happen as well.

Edited by Secure Tenant

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Probably, dragging the thread way, way off topic, but forgive me, as it's an hpc tradition to do that... ;)

It seems to me that at the height of the boom you had people with this mindset

  • my earnings will rise from here
  • the price of this house will rise from here

They then inferred that this made a massive IO mortgage OK, with a little story telling about how in 10 years time they'll be able to switch to repayment. People have obviously been over this on the boards a millions times before I showed up, so there is nothing new here.

However, I do think that enough time has passed since 2008 and our direction of travel has been consistent enough that we can indicate what is actually going to happen to some/many people

  • your earnings will fall or be flat and the cost of living aside from your mortgage will rise, making it harder to pay your IO mortgage
  • the price of the house will fall or be flat
  • you will not be in a position to save for the time when you stop working, hence you will not be able to stop working until much later than you once envisaged.

I just find it bizarre that rather than talk about the mess we've made, the papers ignore the mess and cheer about the fact that house prices are allegedly rising again. It's as if rather than accept that they've climbed into a coffin and they ought to try to get out, people are inclined to cheer on the mortician as he hammers in the last of the nails. Swathes of the economically active population have been taken in hook line and sinker by the predation of people peddling debt and they are now seriously entertaining the idea that more of the idiocy that got us here will get us out of here, whereas really they're just habituating to the acceptance of the restriction of the provision of housing as a way of directing their incomes to the ailing banks.

So, no, on balance, I do not think that a 6% retail bond from a commercial property company is worth a punt.

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What appears to be escaping the notice of hoi polloi is that as per the MaketTicker piece, It's Simple: Adjust Your Expectations Or Die, quoted on the gilts thread (H/T Executive Sadman and Secure Tenant) during the boom we moved from a model where we priced things bought by individuals on the basis of debts being repaid during a portion of their working life (about 20 years) to a model where we priced things on the basis of those debts being rolled over. The key difference is that people die and institutions don't, so the "roller-over debt" model is fine for banks and widget makers, but terrible for an individual.

What concerns me about the UK, is given our complete acquiescence whilst this happened, (Christ, who am I trying to kid, it was worse than acquiescence, plenty of mortgaged owner occupiers and BTLers were certain that rampant HPI was the best thing that ever happened to anyone), and our collective failure to even understand what happened 6 years later after it killed the banks put government finances into continuing crisis mode, I'm starting to wonder whether people will ever work it out in sufficient numbers for there to be a political reckoning for the bubble worth factoring into an assessment of what happens next and when. I used to be more convinced that they would, but looking at abominations like Places for People makes me think that we're a more crooked bunch than I ever really thought, and that too many people who do work it out take that knowledge and just make sure that they are doing their share of the leeching off others.

To put it another way, I'm starting to be more convinced that only when policy tools like QE fail or get out of control and gilt yields take off, will there be a transition to something different, (and perhaps more equitable). In the meantime, we'll just have some vulgar inversion of pass the parcel with the losses, with the government and banks as collaborators and opponents trying to off load as much of the losses as they can onto third parties, each constantly eyeing the other suspiciously to make sure that none of the losses actually are being routed back to them through some cunning ruse on the part of the other.

Places for People appear to be getting called out by the banks twice over. Firstly, they are having to provide the mortgages 100% that banks won't, (presumably because the banks think that house prices may fall, and that banks would rather that Places for People were stuck with the losses, thank you). Secondly, they are having to go to retail investors to raise £40m, which seems like a lot of effort. Essentially, if Places for People want rid of the parcel, they'll need to find a mug investor, or wannabe owner-occupier.

I enjoy this conversation. Thank you.

Thank you for the link (and HT to the Exe Sadman/Secure Tenant again) - however the article is flawed. Your line of thinking and that article assume that rules of current (crony) capitalism operates will not be changed when, say, when the gilt yields take off.

The TPB ultimately sanction is when it runs out of output and people migrated en-mass, or through civil unrest - that is very high hurdle to get through and the majority of the country will not be much better off going elsewhere even if the standard of living drops by 1/3. Until that point, the credit and the debit roughly net off and the parliament, FCA, PRA can move these stuffs from pot to pot by pushing bits of papers around ( no doubt backed by the relevant police forces and armies for those who disagree).

As for house price, as the end of the day, those who have to rent/live with parents suffer less then those who are to be chucked out of their home (and where the local council have to foot the bill). Yes, that creates moral hazards and is extremely unfair to those who are prudent ( a term that excludes the STR speculators) - but then history have been littered with episodes of extreme unfairness.

Several rubicons regarding what TPB (here, Europe, Japan, US, China etc) can or would do have been crossed since the crisis began. There is insufficient reason to think that current set of rules would be maintained when the crunch time comes.

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Actually, IMO there is plenty that is worth talking about here.

Indeed there is, and you make some interesting points. But nothing you say invalidates my observation that this bond is nothing unusual.

Because of the February 2010 creation of the Order Book for Retail Bonds (ORB) by the London Stock Exchange, we can have a look at who has been tapping this market for finance.

I think you could have found that information even before 2010. Though possibly not without spending at least the cost of an FT subscription.

Plenty of property outfits last year too;

That's very traditional. Property companies are asset-backed - the asset being the property. Bondholders like that: there's something to seize and sell off even if the company goes completely titsup.

The other thing that Porca missing is that these bond issues by the property companies are pretty small,

Why am I 'missing' any such thing? You're comparing small-to-mid-cap property companies with huge blue-chips. The figures you quote for NG, TSCO and HSBA are tiny in comparison to their size.

God knows what is really going on. My guess would be that it was a symptom of the post financial crisis world. You have banks trying to reduce their exposure to property companies, pushing those companies to seek alternative forms of finance, and retail investors fed up with 2% being more willing to forego the deposit insurance and take some risk in order to get 6%. It'll be interesting to see if there are any defaults on these bonds in the next couple of years. Again, I would assume that there will be.

You're reading too much into it. Bond finance is perfectly normal. The 'credit crunch' was indeed a game-changer for many highly-leveraged companies including some property companies, but that's behind us now and banks are again keen to lend to anyone with a property portfolio.

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There's nothing unusual about issuing a bond, and 6% is in line with many bonds on the market. Companies of a certain size do it because it's cheap finance - cheaper than a bank loan - if they can get a good-enough credit rating. Investors invest because they get a better rate than a bank deposit and much lower volatility than equity. Many hold for the lifetime of the bond, to secure a fixed income.

Low yield levels have driven a ‘hunt for yield’ across bond markets and the retail market has not been immune to this. 2011 saw mainly rated investment grade companies accessing the retail market, the exception being Tesco Personal Finance, which does not have its own rating. In 2012 there have been 7 unrated deals to date, mostly by FTSE 250 companies. Retail investors may be familiar and comfortable with these issuers, but it is fair to say this represents a move into higher risk and therefore higher yield territory compared to deals brought to market in 2011.

Source: Investec

This analysis of yours is so thin, I'd hesitate to say that it was possible to disagree with it, however IMO what needs to be made clearer is how that their are two things that feed into the cost of the borrowed money, firstly, costs to do with the arrangement and administration of the borrowing and secondly the interest cost, (there may also be costs related to hedging forex risks and similar chicanery, but we'll ignore them for the purposes of simplicity).

In principle and in practice the arrangement and administration costs of issuing a bond will almost always be greater than they would be if you got a loan from a bank (or a syndicated loan from a group of banks). However, as the banks may take a dim view of your creditworthiness, the interest costs may be pretty steep if you get the money from the bank, to reflect the bank's assessment of the risks they are taking by lending you the money.

There may be many reasons to issue a retail bond, (for example the HSBC £196m was actually issued in RMB with a 2.875 coupon so it could have been part of a broader story about the Chinese central bank looking to see a larger role for the RMB and nothing to do with the finances at HSBC), but one of them might be that the bank's assessment of the risk is correct and that basically, nobody should lend you money at any price, (there are some issues even the retail bonds investors have turned their nose up at, link). In point of fact the summing up at the end of the Investor's Chronicle article at the link makes a point which caught my eye, "It comes as little surprise that Stobart pulled its issue - the response was clearly lukewarm. Nonetheless, it is still a shame as it would have offered the ORB market diversification away from finance and property companies."

Why am I 'missing' any such thing? You're comparing small-to-mid-cap property companies with huge blue-chips. The figures you quote for NG, TSCO and HSBA are tiny in comparison to their size.

You're missing the entire point, because you keep referring to "bonds" as if all bonds are the same, when this is at thread about retail bonds and I am making points about retail bonds.

In fact I would like to take a few moments to emphasize that you are not merely missing the point, your analysis is so blunt that you are obscuring the point for anyone unwise enough to pay attention to you.

Retail bonds had a record year in 2012, and are broadly on course for a similar year in 2013, in terms of the numbers of issues. Whilst in the market for investors who are less keen to lose their money this FT piece "Senior bank debt issues slump to decade low" indicates that this year senior debt issuance by the "blue chip" European banks is at its lowest level for a decade but the issuance of subordinated debt is up.

Why are institutional investors no longer willing to pony up for senior bank debt at the coupon the banks are willing/able to offer? Because of bail-ins. Why is surbordinated debt still shifting? Because of institutional investors with a different appetite for risk chasing yield. Why did RBS, notionally with a balance sheet of £2tn, have to go through the indignity of issuing £20m of retail bonds in 2011? You can work that one out. (BTW, I assuming that you understand the difference between senior and surbordinated debt, but I'm willing to admit the possibility that you don't, in which case please ask.)

You're reading too much into it. Bond finance is perfectly normal. The 'credit crunch' was indeed a game-changer for many highly-leveraged companies including some property companies, but that's behind us now and banks are again keen to lend to anyone with a property portfolio.

The Bank of England's April 2013 Trends in Lending paints a different picture:

The stock of lending to the real estate sector — which accounts for around 40% of the total stock of business loans — contracted and the rate of decline since 2012 Q2 was similar to the rest of the corporate sector (Chart 1.1). In recent discussions, some major UK lenders noted the emerging presence of non-bank lenders such as insurance companies and pension funds in the commercial property sector. Looking forward, some lenders expected lending to the real estate sector to be flat or contract slightly in 2013.

Source

Now, to stop being civil, because the suggestion that banks are lending money hand over fist to anyone with a property portfolio is ludicrous, some options

  • You're smoking crack

  • You're projecting your own ignorance on to other people

  • You're a stock broker with a big mortgage

  • All the above

Finally, for the record, you can't invalidate a statement. Only an argument can be valid or invalid. Statements can be true or false. Your suggestion that this Bruntwood bond is nothing unusual is errant nonsense. H/T to Secure Tenant for the page from the CoStar Group Website. Firstly, if we look at all the outstanding liabilities on the the balance sheets of UK property companies then I'm quietly confident that we would find that the percentage represented by retail bonds was vanishingly small, which makes the issue unusual as a way for a UK property company to raise money to fund its balance sheet. The fact that the hpc massive can quickly turn up a page from a "commerical real estate information compnay" quoting the CEO openly discussing how they intend to avoid default on some existing debt instruments, "[t]he de-leveraging of the Bruntwood Group will allow it to engage in an orderly refinancing of its remaining debt and ensure that the noteholders will mitigate the risk of not recovering their investment in the remaining Notes", makes it extremely unusual. What makes it interesting will be seeing whether or not they can shift the bonds.

Of course, it now occurs to me whether or not Investors Chronicle think it's interesting:

Bruntwood's loan-to-value ratio is higher than that of most listed issuers, at 64 per cent, but the Northern office markets appear to have bottomed out in recent months, so this should fall over time. Whether this issue is successful amid the current market volatility will be an important test case for the retail bond market.

Source

More at the link, apparently most of Bruntwood's finance is securitised loans. The IC piece also ties in with the Trends in Lending suggestion that non-banks, e.g. insurers, are getting involved in real estate lending as the banks withdraw, Bruntwood obtained a £120m mortgage from Legal and General last year.

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Why are institutional investors no longer willing to pony up for senior bank debt at the coupon the banks are willing/able to offer? Because of bail-ins. Why is surbordinated debt still shifting? Because of institutional investors with a different appetite for risk chasing yield. Why did RBS, notionally with a balance sheet of £2tn, have to go through the indignity of issuing £20m of retail bonds in 2011? You can work that one out. (BTW, I assuming that you understand the difference between senior and surbordinated debt, but I'm willing to admit the possibility that you don't, in which case please ask.)

I think this is partly true. Partly, banks are issuing sub debt that can be converted into Tier 1 capital (i.e. the CoCos) because that is what they need/what the regulators want them to do at the moment. Senior secure bonds simply help funding flows, but does nothing to help the T1.

More at the link, apparently most of Bruntwood's finance is securitised loans. The IC piece also ties in with the Trends in Lending suggestion that non-banks, e.g. insurers, are getting involved in real estate lending as the banks withdraw, Bruntwood obtained a £120m mortgage from Legal and General last year.

Yap - these retail bonds are totally unsecured and ranked just before the plumbers etc (as I have mentioned earlier). Further, there is a chance that the company may be running out of good securities that the banks will lend on although I think stability and certainty is probably the main drivers here. With retail bonds, the company doesn't have to face the dreaded 'review' calls from the friendly bank managers who would also protest on any imprudent use of fund. Retail bond holders are unlikely have much say if the board decided to double their pay to get the cash out if they see trouble a few years ahead - but senior secured bank debt is likely to have such covenant attached.

Obviously, I have no interest in 'investing' in this issue.

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I think this is partly true. Partly, banks are issuing sub debt that can be converted into Tier 1 capital (i.e. the CoCos) because that is what they need/what the regulators want them to do at the moment. Senior secure bonds simply help funding flows, but does nothing to help the T1.

In my ignorance, I always forget the extent to which the Basel Capital accords weigh so heavily. I was ignoring this, which was obviously an error. Thanks for pointing it out.

Further, there is a chance that the company may be running out of good securities that the banks will lend on although I think stability and certainty is probably the main drivers here.

It does show how slowly it all works through the system.

You've got to love the internet, here are the details of the "£440,000,000 Commercial Mortgage Backed Floating Rate Notes due 2017" which are presumably what they are trying to refinance, (it seems some or all of them will actually need to be paid off in January 2014).

The notes were issued 6 February 2007, and despite my best efforts I can't get an html table to work, so apologies for the mess but this is too good to miss. Look at the bottom tranche, paying LIBOR+0.49%. I think that perhaps that risk was not priced correctly.

Class----- Principal Amount-- Margin (% p.a.)--Fitch--S&P

Class A --£350,000,000-------0.20----------------AAA----AAA

Class B-- £37,000,000---------0.27-----------------AA------AA

Class C-- £53,000,000--------0.49-------------------A--------A

And what did LIBOR do after 2007?

LIBOR-graph-2007-2012.gif

Graph source

Mind you, all money in the back pockets of Michael Oglesby CBE DL in the meantime. Nice work if you can get it, take a massive property punt with £440m of somebody else's money, then find out that the world has decided that essentially you can have their money for nothing for the next 7 years. It's little wonder that their interest cover looks so friendly! Winners and losers.

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Looking at the Bruntwood financial statements in the retail bond portfolio, and the interest charge in the accounts on these FRNs is about £23m, suggesting that they are paying about 5%...which is odd

A note on the interest rate swaps in the portfolio explains all, I think, (from Note 18 - Loans).

Interest Rate swap contracts

Bruntwood Alpha plc has entered into a £432.55m interest rate swap agreement at 4.9025% where variable rate

interest payments are swapped for fixed rate interest payments. This has been done in order to hedge against

cash-flow interest rate risk arising from the variable rate bonds. Bruntwood Alpha Plc pays a variable amount

on the bonds and receives/pays the difference between fixed and floating to the swap provider (The Royal Bank

of Scotland Plc). This allows the Bruntwood Limited group effectively to pay a fixed interest rate on the

majority of its outstanding debt.

The interest rate swap contract matures on 15 January 2014 in line with the bonds expected maturity and had a

fair value of £24,510,000 liability at 30 September 2012 (2011 - liability of £38,597,000).

The group has entered into 10 interest rate swap agreements covering 55% of the total medium term loans where

variable rate interest payments are swapped for fixed rate interest payments varying between 3% and 4.985%.

This has been done in order to hedge against cash-flow interest rate risk arising from the variable rate debt. The

interest rate swap contracts mature at various dates between December 2012 and December 2017. As at the

30 September 2012 the interest rate swap contracts with a principal value of £290m (2011: £290m) have an

aggregate fair value of £19,803,000 liability (2011: £13,064,610 liability). Of the £290m, interest rate swaps

with a principal value of £200m are contracted to start in January 2014.

:lol:

That's hilarious. First, RBS got them to swap LIBOR + 0.20% for 5%, and then RBS won't give them a loan to refinance the FRNs when they fall due. Wow. You've got to love bankers.

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The notes were issued 6 February 2007, and despite my best efforts I can't get an html table to work, so apologies for the mess but this is too good to miss. Look at the bottom tranche, paying LIBOR+0.49%. I think that perhaps that risk was not priced correctly.

Class----- Principal Amount-- Margin (% p.a.)--Fitch--S&P

Class A --£350,000,000-------0.20----------------AAA----AAA

Class B-- £37,000,000---------0.27-----------------AA------AA

Class C-- £53,000,000--------0.49-------------------A--------A

And what did LIBOR do after 2007?

Thanks. An excellent piece of research. AAA rated hah... I am out (as was before) :rolleyes:

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  • 244 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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