Sustainable bond framework and earnings

In this note, we examine MH’s eligibility to issue sustainable bonds. Its strong ESG credentials were explored in detail in our 11 September 2020 initiation, Low-risk issuer in a low-risk market, with its borrowers providing social housing in an environmentally friendly manner. Critically, MH now has the processes, audit trail and multi-layered independent verification to evidence compliance with sustainability bond requirements, and so access this new investor base. The housing association (HA) market is low-risk, and MH has taken the incremental steps to further reduce risk, driving sustainability in earnings as well.

• Sustainable Bonds: MH’s Sustainable Housing Assessment will align with the International Capital Markets Association’s (ICMA) “Sustainability Bond Guidelines” by documenting social and environmental benefits. We believe they were a core philosophy before, but that now they can be demonstrably evidenced.
• Independently reviewed: Further enhancing the audit trail, MH has involved third parties throughout this process. Sustainalytics has independently reviewed MH’s framework and provided a positive second-party opinion. NatWest’s Sustainable Finance Team and Ritterwald also supported its development.
• 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 (47bps, 25% 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, 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, we believe.