Friday, 4 December 2009
Further to today’s Base Rate cut, I saw some interesting analysis earlier this week from one of the Banks which predicted a fall in Bank of England Base Rate to 1% in the near term and for it to stay there until well into 2010. Certainly an aggressive call but I wonder if any of the clients that we deal with are likely to see the benefit?
If base rate fell this low, the remaining commercial lenders in the market that are lending on Base Rate are sure to take the opportunity to change the products that they offer to a LIBOR linked facilities. The monies that the lenders buy in through the interbank markets is all linked to LIBOR so further falls in Base Rate will mean that the lenders will be losing even more money.
This also doesn’t take into account the battering that Sterling has been taking lately and further cuts in Base Rate are likely to create even more pressure in this area.
Another factor that will affecting a number of clients are the minimum rate clauses in their loans. These do exactly what they say on the tin, ie. they are the minimum charging interest rate for that product. When Base Rate fell to 3% we had a number of calls from clients who wanted to know why their repayments had not fallen and it was because their minimum rate clause had been enforced.
The minimum rate usually includes the margin also and this will certainly affect a lot of people if the Base Rate falls to 1%. These are extraordinary times though and the minimum rates should be looked at in comparison with Base Rate over the last 25-years or so and a minimum rate of 4% or 5% is still historically low.
Tuesday, 20 October 2009
I was looking back over previous market commentaries I had written and I came across this one from back in February when 3-month LIBOR was stubbornly refusing to reduce in line with Base Rate.
Today, 3-month LIBOR stands at 0.57%, almost at parity with Bank of England Base Rate at 0.5%. This has certainly eased the pain for those operators who were suffering from LIBOR’s refusal to fall quickly and they are now enjoying the same low interest rate environment as those on Base linked deals.
One of the curious things about the current commercial fund raising market is that the lenders who still offer a choice of Base or LIBOR linked funds are offering lower margins for funds linked to LIBOR than those linked to Base Rate. In some cases, the difference in the margin is as much as 1%. This is due to LIBOR being a faster rate, insofar as it will rise more quickly than Base Rate as and when rates start to rise again. There is speculation over the timing of rate rises but the consensus seems to be that this will not be for quite a while as per the comments in this article on Bloomberg.
Of course, there are still those clients that are stuck on minimum rate deals and within Interest Rate Management instruments. The break clauses for some of these clients can prove prohibitive and the desire to move where the client’s existing Bank may not be supportive of their future plans has to be offset against the cost of moving Banks. These costs can be kept to a minimum and many hedging products can be transferred over to a new lender.
We are seeing quite a few opportunities in the current marketplace where previously aggressive and helpful Banks are now actively seeking clients to refinance away from them to reduce balance sheet exposure. We are also seeing lots of activity where clients are expanding their existing homes or groups are looking to acquire closed homes.
Thursday, 6 August 2009
Interestingly, the Bank of England decided to expand their asset purchase program by a further £50bn to £175bn today. They also kept interest rates on hold at 0.5%.
The markets took this as a sign that any hopes of recovery or a things getting less bad are fragile and further stimulation is needed to maintain any momentum that may have been generated. All eyes are now on the Bank of England’s revised economic assessments due out on 12 August. If you want to read more, there is more information on Bloomberg here.
One thing that is encouraging for Healthcare operators is the steady fall of 3-month LIBOR, which today stands at 0.87%. This reflects the increasing timescales that lenders are prepared to lend to each other and at somepoint has to filter through in lower borrowing costs for the Banks that then MAY be passed on through to operators.
With Base Rate more closely reflecting 3-month LIBOR, those that were losing out when LIBOR skyrocketed are now seeing the benefits of a lower margin, although they may now be falling into the minimum rate trap that some of those on Base Rate have encountered.
In terms of the long term prospects for the interest rate markets, my feeling is that rates may remain low for a while longer than most people think and the current clamour for long term fixes may be a little too soon. Everything that I have seen in terms of analysis points for Base Rate remaining at 0.5% until at least the end of 2010 but here is why I think it may remain lower for longer;
- Record levels of unemployment – by the end of the year, unemployment is expected to hit around 3 million, not including all of those other categories that keep this figure artificially low. This figure is not going to drop dramatically as any recovery is expected to be long and drawn out. The Bank of England rate setting is independent but there will be huge pressure on them not to add to the plight of the unemployed and struggling businesses by putting up rates.
- Political – a general election is due in May 2010 unless an unlikely autumn election is held. Rates won’t change up to this point and we will then have either the same party in power or a new broom. Cuts are inevitable with both parties and indeed necessary with the prospect of a debt downgrade by the rating agencies if public finances are not in order. A recovering economy will not be able to handle the increased rates that will need to offered on lower grade debt and the economy cannot recover without the rates remaining low to facilitate growth.
Finally, we are starting to see some sense being applied to the lending decisions coming out of Banks and they are starting to recognise good risks again. Good care homes and operators are being rewarded with better terms than those new to the industry and it is becoming easier for us as a broker to give an indication of what types of facilities are going to be available on any given deal. We are also seeing that many operators are extending their care homes at this time to take advantage of the low build costs and cheap money available at moment.
To answer a popular question to us, the best rate I’ve seen this year is 2% above base rate (with no minimum rate), so an overall charging rate of 2.5%. Given that some operators are stuck on minimum rates of 4 or 5%, there is the prospect of savings to be made here.
Tuesday, 23 June 2009
Since my last commentary in May, we have noticed a significant number of new deals have been agreed by our clients on care homes. The activity level is more significant than over the last 6 months or so.
Looking at the details of the deals that are being agreed, I would suggest that this is because the homes that sales have been agreed on are more reasonably priced in terms of per bed and price multiples than in recent history. We are seeing businesses that are now looking to change hands within the 7 to 8 times profit multiple, rather than the ‘boom’ prices that were sought towards the back end of last year.
I think this is rather encouraging and perhaps reflects a new level of realism being quoted by selling agents when they are visiting prospective sellers and the subsequent expectations of vendors when they finally come to the market.
Another factor to consider in this new lower price environment is that the lenders are lending at lower loan to values across the board and this must be having a knock on effect on prices as purchasers can no longer gear themselves to higher levels to achieve larger profit multiple purchasers.
Indeed, as far as the lenders are concerned, we are still seeing a relatively risk adverse stance from the lenders in the market. The quoted top loan to value of 75% on a stand alone basis is very hard to achieve and has some very strict criteria attached to it. More realistic is a 65-70% funding position and many clients are starting to considering the benefits of having a lower debt position, this being increase profitability and cash flow.
Banks lending at lower loan to values can be a problem to some prudent operators who had manoeuvred themselves into a good position to take advantage of the well priced opportunities in the market right now. They are finding that their own Bank have taken a more risky approach to their own affairs and have no funds to lend or make it extremely difficult to borrow. In many instances, Banks are looking to enforce any broken covenant that they can to justify a rate increase or change in terms.
Of course, we still have lenders who are actively looking to lend within healthcare and as such, we have been able to help a large number of clients recently who are stuck in this tricky situation.
Friday, 15 May 2009
I just picked up this interesting article on Bloomberg indicating that the freeze in the interbank markets could be thawing.
(click the link above).
I also heard this anecdotally from a treasury market trader, who was indicating that trades for 3 and even 6-month money between lenders were starting to happen. This must reflect that all of the various measures by central bankers and stress testing of banks and institutions has perhaps had the desired effect.
I am by no means calling green shoots but this could mean a gradual return to some degree of loan pricing and loan to values decided on risk rather than ‘take it or leave it’ default minimum terms. In recent months, lenders have been falling back to very conservative loan to value ratios and pricing that was more or less standard irrespective of the kind of risk presented to them. This has been frustrating for clients who are in a position to buy but have found their lenders unwilling to assist them take advantage of some once-in-a-generation opportunities.
It will be interesting to see how long this thawing of the interbank markets takes to filter through to the lending areas of the Banks in our markets. I hope that it is soon so that we can get back to arranging deals where the pricing accurately reflects the detail of the deal.
Monday, 23 February 2009
The Bank of England Base Rate was cut today 50 basis points to 1% today, which begs the question, will rates go any lower? Everything that I have read seems to indicate that 1% is where the bottom of the interest rate curve is going to be and is likely to stay there for 2009 and into to 2010.
If we have reached the bottom of the interest rate curve, perhaps it is time to fix in the cost of funding. The latest fixed rate quotes that I have seen at the end of Jan are;
2-year – 2.16% + margin
3-year – 2.75% + margin
5-year – 3.21% + margin
I guess that if this is the bottom of the market then fixed rates will presumably be on the rise going forward – you can see the trend.
From a Bank perspective, there are now only a couple remaining in the Healthcare sector who are lending at margins over Bank of England Base and only one remaining Bank who is lending at Bank of England Base Rate at any serious funding levels. Margins are also on the way up and risk departments of commercial lenders are really driving the Banks at the moment which is why we are seeing loan to value levels being scaled back for lesser quality deals.
In the future, all Banks lending into the commercial sector will probably end up with LIBOR linked products and because of this, I think we will see a greater number of clients using sophisticated financial instruments to mitigate interest rate movement risk. The 3m LIBOR rate (2.16% today) is proving to be quite stubborn in moving quickly down to parity with Base Rate. To an extend, this reflects the mistrust of the Banks of each other. There was an interesting article here that made The Times that was sent to me by a friend at Investec which indicates how this problem might be solved.
Lastly, I had an interesting lunch with one of the top valuation firms within the Healthcare sector the other day. Their general outlook was that values within Healthcare are holding up but because of the lesser number of buyers around, there are less numbers of offers going in on any given business for sale which has a knock on effect of on the values that are achieved for sale.
A lot of the determining factor of value (and this has always been the case) is to do with the quality of the business being valued but this is more important today than ever. The valuers were saying that it is no good for an owner or seller to just have the financials of their business written down on the back of a scrap of paper but to create an audit trail and justification for their valuation, the valuers are now all looking for historic accounts and accurate up–to-date management info.