Low-risk issuer in a low-risk market

11 Sep 2020 / Corporate research

MORhomes (MH) is a pooled borrowing vehicle for housing associations (HAs). It offers its HA borrowers a flexible experience, rapid access to funds and potentially lower-cost funding. To its Social Bond investors, MH offers access to the socially responsible, low-risk HA market. MH’s processes, capital structure, borrower selection and alignment of interests all reduce risk further. MH’s launch involved many of a competitor’s customers, and it has a unique position in the HA middle market. As it grows and matures, we believe it will be increasingly attractive to more borrowers. Its bond spreads have fallen by 29bps (15%) since launch.

  • HA low-risk: We are not aware of any capital losses incurred from lending to the large, long-established HA market. MH has i) resilient tenant income, ii) high-quality, conservatively-valued security, iii) government financial support, and iv) regulatory supervision. The COVID-19 crisis has confirmed this resilience.
  • MH-specific risk reduction: MH has below-sector risk, with i) robust credit risk processes, ii) focused borrower conditions, iii) borrower financial resilience, iv) equity, contingent convertible and senior debt support, v) portfolio diversification, vi) excess, effective security, vii) undrawn £20m liquidity facilities, and viii) growth.
  • Valuation: As a new issuer, with a modest number of existing borrowers, MH’s cost of funds is above its expected, long-term level. Its spreads have already started to tighten (29bps, 15% since launch); and, as the business grows and matures, further tightening, and so capital appreciation, may result.
  • Risks: For credit risk to be an issue, we believe it requires i) a material change in government policy, ii) customer behaviour to change, and iii) house prices to fall. Most regulatory changes have seen little effect, although the impact of Universal Credit (UC) has yet to be fully felt. Liquidity risk is tightly controlled.
  • Investment summary: MH is a pooled borrowing vehicle with a unique position in the low-risk HA mid-market. It was established by many of a competitor’s borrowers who wanted a more flexible, quick and low-cost service available to more of them. It focuses on the middle market, and with robust credit procedures, significant capital support, borrower alignment of interest and good security, so risk is further reduced in a low-risk market. Growth will deliver economies of scale and reduce interest costs, making MH even more appealing to borrowers.
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