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1H23 Market Update
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Unsurprisingly, the central conversation topic with borrowers remains the trajectory of rates. While opinions vary depending on views around inflation, history tells us the forward curve is unlikely to capture the full story.
The "Hairy" Chart
The affectionately known “hairy” chart plots actual base rates versus previous forward curve predictions.
Up to 2021, forward expectations were consistently higher than where rates ultimately landed.
This trend has however inverted post 2021 with the forward curve, in most instances, underestimating both the pace and magnitude of rate rises as evidenced again in the June-23 hike.
Despite rate increases continually exceeding forecast, the pace of unwind remains fairly consistent with rate reversion therefore pushed to the right.
Discussion Points
- Data suggests GBP and Euro rate cuts unlikely until end of Q1 2024 with reversion to today’s levels only by Q4 2025 (SONIA) and Q1 2025 (3M EURIBOR).
- Notably, over the last month the gradient of future GBP rate tapering has become more shallow, with SONIA only dropping below 4.00% in 2028.
- With rates higher for longer, certainty can offer value particularly for longer term investments. The shallow tapering is lending itself to flat fixed rate GBP coupons across longer tenors supported by an inverted spread curve.
- Further, at shorter tenors the current pricing delta between floating and fixed rate is low, offering downside protection to future SONIA risk in an unpredictable environment.
- For companies with near term funding requirements, delayed private placement funding of up to 12 months is currently available at very low/no cost. This again has the potential to de-risk refinancings should the current curve underestimate the future rate profile.
Pricoa London: Solid Activity through H1
- Provided $1bn of capital across 15 corporate and infrastructure companies, 8 of which are new borrowers.
- Continued to provide capital across broad range of sectors despite challenging macro environment demonstrating our long-term philosophy.
- The market remains active albeit with a trend for issuing in more gradual increments given rate environment.
- Many companies have sought to achieve this through establishing a Pricoa Shelf which provides the dual benefit of a small issuances and enhanced future liquidity in the private market.
- $475mm of Shelf capacity established as companies increasingly seek flexibility around access to capital (e.g. M&A, rate averaging).
- GBP coupons relatively flat across longer tenors. Euro rates remain c. 150-200bp inside of GBP.
Value of the Shelf
The Shelf facility is a flexible option on longer term capital:
- Terms and facility documented upfront in the form of a Note Purchase Agreement.
- Company can elect to draw a portion of Notes at the point of close, or leave the Shelf undrawn.
- Future draws (priced at point of draw) in multiple increments or single draw.
Benefits:
- Speed – ability to access longer term capital at short notice (e.g. M&A)
- Flexibility - ability to draw in small increments to allow for interest rate averaging over time.
- Diversification of funding sources.
- Low cost of carry
July 14, 2023
For more information, please contact:
Rhiannon Ledger
Principal
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