Cretit Rating Downgrades

Moody's has downgraded the credit ratings of a number of housing associations, including Places For People. Nothing to be overly concerned about, but something else to be monitored, and for all bond holdings - especially those that are BBB or Baa rated, which are a few notches above being sub-investment grade, a.k.a. 'junk'.

The final terms documents for the PFP retail bonds stated that Aa3 ratings were expected, so a one notch downgrade would put them at A1 (so High Grade down to Upper Medium Grade).

Google FT headlines:
  • Moody’s downgrades UK councils
  • UK borrowing costs fall despite rating cuts
I think that the headline of the second article puts recent events into perspective rather nicely.

To be taken with as big a pinch of salt according to personal taste!


  • Thank you for pointing this out. It would appear that Places for People 5% Dec 2016 is at 107 bid, which is a YTM of 3.5% or so. Surely holders should ditch that.
  • sold all mine recently. There was one years interest in selling at the current price plus the daily interest on the sale
  • Those that bought at issue will still have a YTM of 5% regardless of the current price - that is the yield to which they were fixed when the bond was bought - unless they choose to sell in before maturity, in which case the yield that they actually achieve will be different.

    The problem with selling, is what to buy and how long will the wait be before a purchase? If a bond is sold above par an not immediately re-invested then what is lost is the difference between the interest that was being earned from the bond, and the interest now earned on the uninvested cash. Wait too long and the total return could work out lower than if the bond had been held until maturity.

  • I'm surprised that a torrent of negative comments about credit rating agencies hasn't already started, given that most people posting here rely on their own counsel about the risks associated with bonds.

    I'll just make three observations:

    1. The whole concept of a linear rating scale to adequately describe the risks around corporate debt belies the multi dimensional nature of credit risk. Profitability, asset base and sustainability of business model are all very different things, and the way in which you as an investor weigh up these things will depend largely on your own attitudes and investment goals.

    2. There is something deeply dysfunctional about the cliff edge between BBB- and BB+ debt. There is, after all, a very substantial zone in between completely safe debt and paper fondly referred to as "junk", implying worthlessness or at best dubious value. Most of the retail bonds issued recently (generally unrated to avoid the dreaded junk rating) fall into this zone.

    3. Sovereign credit ratings are more about politics than anything else. The UK government, for example, logically cannot default on sterling debt unless it wants to, because it can literally create sterling currency as desired. Obviously, countries daft enough to join the Euro can't do this, but that's their problem.

    So really what we are talking about when assessing the "UK credit rating" is the future value of sterling (the more money they print, the less £1 is worth relative to other global currencies and the commodities these are priced in).

    This makes the downgrading of the PFP bonds (for example) a rather perverse decision, given that these are largely property backed. Land is land, and people need somewhere to live - debasement of the currency won't hurt the real value of property. So in my mind there is little doubt about you getting your money back; the question is more one about the yield you need to get on a sterling bond to stay ahead of inflation.

    I actually rate the PFP 1% RPI linker, because there you've got an asset backed bond covering any loss in the purchasing power of sterling via the RPI link. Given that index linked gilts are trading at negative real yields, and things like gold could well be in a bubble, I honestly can't think of a safer thing to do with money you need to preserve in real terms in the current climate.
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