New ORB bond-Heylo Housing 1.625%, RPI linker, 2028

Just been notified of this new bond and closes 22nd October.
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Comments

  • Yeah just been emailed this - need to get my head around this one. From a very quick read it's the capital amount that is RPI linked and RPI's currently 2.4% and that would presumably compound up over the years. I wonder how they handle this mid year ie if you sold after 18 months do they accrue the RPI day by day - its probably in the prospectus but i havent got that far yet
  • Good question DavROs, i guess we will all be looking closely at RPI accrual.
  • Don't have a lot of time, but there is the TESCO RPI linkker to compare with for those with the time.
  • I've just had a look at the prospectus and the calculation of interest, etc. beggars belief. I cannot believe that the complexity involved is really necessary to arrive at a reasonable rate of return for investors. Bearing in mind that any index-linked vehicle is bound to involve big assumptions about where inflation might go anyway I can't be bothered to try and work out what this bond might possibly produce for me in the long run. I'm out!
  • I think the first point of analysis is the credit worthiness of the issuer, I'm not sure about it.
  • Good afternoon - in the interest of full disclosure, my name is Michael Dyson and I am part of the lead management team at BondCap.

    I would like to respond to a couple of the comments above please.

    Firstly regarding the historic rate of inflation. The headline rate of inflation for the 12 months to August (the last published statistic) was 2.7% but that was for CPI. All inflation linked gilts and most corporate inflation linked bonds continue to use RPI which has most often been higher than CPI. In fact RPI over the same 12 month period was 3.5% and this bond is RPI linked.

    Turning to the point about complexity. While the detailed calcs in the Prospectus may be unfamiliar to many, we have followed the approach for traditional index linked gilts, often referred to as the “8 month lag” gilts.
    This means, the PAR (redemption value) is adjusted with inflation semi-annually (on an 8 month lag), and the income is calculated on the updated PAR value.

    However, this bond also has an “upward only feature” so where (and exactly as above) at every coupon date the PAR value is adjusted upwards in line with the rate of increase in the RPI, unlike IL gilts and most other corporate IL bonds, should inflation turn negative the adjusted par value will stay where it is and will not go lower.

    Through this approach, both the income paid, and the final redemption value, will be adjusted in line with RPI “upwards only” and I accept that this feature has added a couple of extra calcs to the standard gilt formula. For this reason, we have also included some worked examples in the Prospectus, the Information Booklet, and Key information Document.

    I hope that helps a little, at least?…..
  • BondCap good afternoon and thanks for your input especially regarding the link with RPI rather than CPI and confirmation of the upward only feature. This i saw when studying the prospectus further. I rather like the look of this bond and i suspect quite a few others do too but it is a bit different to the regular offerings that are straight interest paying bonds and easy to understand.
    One thing maybe worthwhile is replying here to DavROs point ( comment above) ref the treatment of mid year trades with regard to the RPI accrual. I guess it would be the same as accrual of day counts for regular interest payments or is it a once in a year event. ?

    Also if Oliver is reading these threads i think we would all highly appreciate your input as i feel there will be a lot more questions that need answers in your normal straight forward way. Many thanks in advance if you do.
  • edited October 2018
    As Paddy says above the credit worthiness is rather more important and seems to me is much more unclear than the RPI interest. Its stated the bonds will maintain 1.2 cover but seems to me these are the goverment help to buy houses where prices are well inflated by demand and the builder to help make a deposit contribution along with the government. So in any sell off the 1.2 cover would evapoate fast ?
  • Good aft' all. Just to advise that Oliver has commented on Heylo and is to be found herein under ' Analysis and comments ' and then drop down to ' Bond of the week '. Mostly bullish with some caveats, certainly not a disaster. Happy reading.
  • P.S. to Oliver a big thank you for clearing some of the mud from the water on this.
  • edited October 2018
    Oliver - an especially big thank you for this analysis. A lot here to be read, re-read and assimilated. Be interesting to read the comments that I am sure will appear below this.

    Woz
  • I would suggest that as there are "No Financials" to be shown, that potential investors should review social media posts as to what customers have to say regarding Heylo Housing!
    Just a Suggestion!
  • I did see that but the media commentary was largely about what they have achieved with their current portfolio and bond financing with Lancashire.
  • I have decided not to invest in this one.

    I would have to sell other investments in my ISA to purchase and this doesn't look appealing enough to do that, if it was at the beginning of a new ISA year I might have had a small punt

    Woz

  • I will be giving this one a miss, too complex for the ordinary investor like me
    The accounts of RESIMANAGEMENT LIMITED raises too many questions
    https://beta.companieshouse.gov.uk/company/08155459/filing-history
  • Thanks to Oliver's brilliantly comprehensive analysis of how Heylo will operate I now understand a little bit more about why the interest calculation is as it is. Heylo wish to relate income to outgo and not have to worry about where inflation goes (hoping, of course, that it won't go down). However I am not being offered an equity share in the company I am being offered a fixed (albeit linked) return. On that basis I would expect to be offered a decent return regardless of future inflation. The fact that I would also have to wait until the end of ten years to receive a significant part of the return anyway (unless I sold early) means that this is certainly not an offer for me.
    It was nice to see a new offer and full marks to Heylo for trying something different but I suspect there are many other fixed income fans who will also give this a miss. I did note that Oliver didn't actually say he would be buying in either.
  • Apologies in advance, if this sounds like a foolish question.

    I'm trying to get my head around how much the bi-annual coupon payments will be. I wonder whether anybody might be able to help me please?

    I'm assuming that it will be calculated at 1.625% + the RPI, aggregated over the 6 month period, so assuming RPI averages at say 3.5%, over the 6 months, the coupon payment will be 5.125%, of the sum invested.

    Reading the prospectus and KID, it refers to the coupon being paid on the change in RPI, so assuming that's say an average of 0.2% per month, over the 6 months, I then calculate the coupon to be 1.625% + 0.2%, totalling 1.825% (not anywhere near attractive enough).

    It's probably me being daft, but if anybody is able to help clarify, I would be very grateful. I was going to call HL, but I'm pretty sure that the people in the dealing room, will be baffled too:-)

    Thanks in advance.




  • Thanks Oliver, much appreciated, as geoffp mentions there is more credit risk with this structure as the final bullet payment is inflation adjusted. Re Tesco inflation linked bond, IMHO Tesco is a solid credit these days. I will also pass on this, imho Heylo should have offered a standard bond with a fairly juicy coupon given the risk.
  • edited October 2018
    Yes thank you Oliver. Paddy think Hylo did inflation adjusted as its fair to expect rents & capital values to be inflation if ex out supply/demand factors, etc. AF10 as a holder of the tesco linker I know the RPI element is rolled up and paid out at maturity, the market price should adjust for the inbetween time, if other fators are ignored, so you will get 1.625% per year as a coupon and the bond market price, all other things being equal, will rise the RPI over the original issue price. This as Paddy says does increase credit risk as over 10 years RPI could be quite a bit. As for media commentary, speaking as a small time landlord, some tenants can be hard work and going on social media is instant reaction of thiers, so would take some with a pinch of salt, however at present I dont intend applying for this bond as agree with geoffp above
  • Thanks very much indeed Hind, for explaining, that's very helpful. I'm also out and would rather wait for another "traditional" coupon paying bond. Be interesting to see if this one takes off, as nobody seems keen!
  • edited October 2018
  • Good afternoon, and I would also thank Oliver for his typically thorough and balanced review of the latest bond offer.
    As the lead manager, I cannot say too much about the current offer in this forum but I can give some background and context to our involvement.

    I manage my own SIPP and I am at an age (late 50’s) where the value of that SIPP and my ISA will make a significant difference to my future as I will be depending upon my savings to fund my retirement in a few short years. None of us ever know for how long that will be.
    Within my SIPP I have some cash, some bonds, and some equities, but I am a bond man at heart. For me, equities are a casino and as my timeline to retirement gets shorter I am increasingly reluctant to over commit to equities in case they fall sharply (individually, or as an entire market).

    That said, I suspect I will always have some exposure to equities, especially whilst bond yields remain low, and because I am comfortable in taking some risk in an effort to counter the erosion of my spending power from inflation. For me it’s a question of balance.

    When it comes to bonds, I prefer not to buy bonds that are far above par, or too long dated, and Index Linked gilts offer heavily negative real yields. Added to which the EU prospective directive which, amongst other things, wanted to make new bonds safer for retail, became demonised by some banks so that most large corporate bond issuers avoid offering their rated bonds in retail denominations …. My choices are therefore quite limited.

    The irony here is that what attracted us to Heylo in the first place was the simplicity, not the complexity.
    For their existing bonds, they built a portfolio of homes that generate RPI linked cashflows, with upward only rent reviews, on 125 year leases. That supports a “wholesale” bond that similarly inflates the PAR value and therefore the (admittedly modest) income, upward only, without the use of derivatives, without subordination to senior lenders, and from assets I can identify with… arguably similar to a buy to let portfolio perhaps?

    The inflation market currently assumes 3%pa for the purposes of calculating returns and if there really is a constant RPI of 3% for the next 10 years (unlikely), the repayment value for £100 of a 10 year bond would be a tad over £134. Subject to credit risk and taxes of course.

    At that point I must return to the absolute importance of understanding the risks, and the information that must be studied before making decisions within a balanced portfolio. ….
    This link is to the documents that are mandatory reading for anyone considering buying the Heylo bond http://heylohousing.com/bonds

    And for more general information about the broader group this is worth looking at http://heylohousing.com/new-blog/

    Good weekend to all - MJD
  • Hello - Well I am in for a small amount as I like to participate in most new issues to add to a varied portfolio of 'fixed interest'. Consider the risks O.K. This will be our first i-linked bond, though. At less than 1% of the portfolio it is not that significant and will be an opportunity to see how it performs.


    As an aside, I have not lost money on the less than thought to be top-notch names. It is the banks that have played 'dirty' - Horta-Osario's Lloyds and the Coop Bank now in the clutches of mainly US hedge funds.
  • I will probably go for some of these as part of the long-term capital preservation component of my portfolio, rather than the yield. The RPI ratchet and the security are attractive aspects. Now I just need to think about the credit quality, which is not as high as NS&I (obviously), gilts (terrible yield) or possibly even Tesco bank (linker maturing in 2019).
  • “ For me, equities are a casino and as my timeline to retirement gets shorter I am increasingly reluctant to over commit to equities in case they fall sharply (individually, or as an entire market).”
    Of course, the goal posts have moved, since there is no longer an obligation to purchase an annuity. The vast majority of us will be using drawdown and continuing investment. Your investment time frame should perhaps be targeted closer to life expectancy, rather than retirement date. I agree that there seems to be a high risk environment in the coming years, so it is almost certainly correct to be risk adverse with regard to equities right now.
  • edited October 2018
    Unless im missing something Heylo housing have the risk free one way deal here. Putting no capital or parent guarantees in, they get management fees and if the assets do well the profit after the bonds paid back in 10 years.
  • I really wanted to participate in this offering as it is novel and maybe even ground breaking, certainly for a small enterprise. My biggest problem still is like geoffp states above the wait for return of capital and the roll up of interest of 10 years plus is just too long. At least if you buy into a regular bond paying say 4.5/5.00 pct p.a. you mitigate any potential capital loss over the period by that amount and that risk is understood and accepted. If Heylo goes down the tubes you have only 1.625 pct p.a. ( plus RPI ) to soften the blow of100 pct capital loss. Also i suspect the dealing spread may well be wide given the nature of this offering so a fire sale, certainly in the early years might not net you any return at all.
  • Hi sussexmade

    A fire sales of 125 years of inflation linked rental income would not net any return? How did you work that out? I only ask because all of the private rental schemes funded by long term investors seem to work on the basis that such cash flows do have value. This is important because if you are right then all of the pension funds and insurance companies who are doing PRS must be wrong?
  • SMU, just to say the ' trading' company is not trading yet, no track record and when it does get the funds and start trading there is still no parental guarantee and no foreseen equity stake by the management team. When i mention fire sale i meant by the individual not the company and that might come after just a few weeks/months due to changeing personal circumstances-in that case you wouldn't earn a penny but hopefully get your capital back.
    I might along with the others on here be missing a gem.
  • I've come a little late to this party but this looks interesting. I hold all the existing orb listed index linked corporate bonds and plenty of index linked gilts in my pensions. I see them partly as a hedge against my other bonds which would fall if inflation does take off. However you do need to get your head around how index linked bonds work. A few years ago I was involved in setting the advanced investment exam for Financial Advisors and did a long case study question on all aspects of index linked gilts and it turned out knowledge in this area was significantly lacking even by those working in the investment field.

    Like a few others my main concern is the lack of trading history and the credit risk appears lower than the existing orb index linked corporates issued by Tesco, National Grid, Severn Trent and Places for People. I need to decide if the higher coupon is sufficient. Coupons are low due to the nature of the bonds, however the price of the bond should gradually rise as time goes by so this is where you get the rest of the return unlike a conventional bond. As long as they are traded and there is a liquid market, the price shouldn't suddenly jump up at redemption which some people seem worried about. If you look at the existing index linked corporates on orb they are all trading in the low to mid 120s and have yields ranging from RPI minus 0.3% to RPI plus 0.5%. I would expect this issue could be less liquid than those which could hold down the future price a little.
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