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



  • For those still getting their heads round the coupons, for bonds with an 8 month indexation lag you always know the value of the next coupon. So for example in this case if the first coupon was due in April 2019 it will use the difference in the RPI index from Feb 2018 (278.1 as at the 14th) to August 2018 (284.2)

    Dividing one by the other gives 1.0219. In practice these numbers will be adjusted slightly to give the exact RPI 8 months to the day from the date of issue to the coupon which is actually paid in March. The info booklet calculates this.

    So if you bought 10,000 nominal the fixed annual coupon would be £162.50 divided by 2 = £81.25 multiplied by 1.0219 so £83.03 and then adjusted for the fact the first period is a bit shorter (the payment is in March so is based on July RPI at 281.7)

    Future coupons will take RPI 8 months before and divide by the same starting value 278.1 from Feb 2018 to give the adjuster to apply.

    If the yield to redemption is to stay at RPI + 1.625% the price of the bond should also rise slightly.
  • Frugal,
    I be interested in seeing what you think the credit risk is?
    It wasn't long ago that I wanted the issuing company to have a capital capitalization of half a billion pounds!
  • Really hard to say and that's what is holding me back at the moment. I like index linked bonds as part of a portfolio and they are few and far between with gilts offering poor value. I should have put a bit more in the NS&I Index Linked savings Certificates last time they were on offer a few years ago. As you know I'm usually pretty risk averse.

    The idea seems sound and makes sense. Oliver raises some potential issues but buying at 60% of market value seems to give a margin of safety and affordable housing will always have demand although throwing people out of their homes if they can't afford the mortgage/rent could present problems. It's just that over the years I have seen (and sometimes invested in) many apparently lower risk investments that ultimately ran into unforseen difficulties.

    The dog needs another walk so this will give me some more time in the fresh air to think about it further. I'm considering a small investment and maybe top up in in the future once they are up and running. Either way I will keep an eye on how they do
  • I'm also wondering if this one will get off the ground. Oliver's piece was excellent but didn't give an unequivocal recommendation to buy that some people need to convince them to go ahead. The additional complexity of index linked bonds also seems offputting for many whereas I can remember double digit interest rates and see the benefits of the asset class and how the returns over inflation can be achieved via the rental income.
  • I guess, it will be the professional institutions, eg assurance / insurance who very often invest in long-term index linked securities to balances their longer assets / liabilities, that decide whether this issue will get off the ground. The volatile markets since 1st October would not have helped the situation.
  • edited October 2018
    The index linking is only as good as the credit risk. As there appears no equity or parent guarantees here then as others have said its equity which is fine if thats understood. If we presume a new buyer of the property in 10 years will want the same 60% discount that Hylo are getting then the initial discount/cover is a bit debatable. Using Olivers numbers each 60k produces 2117.50 after management fees so 3.5% rising with rpi +0.5%. This 3.5% in my experience is roughly the same as one would expect on buy to let after costs, but rent rise headroom is higher due to the 40% discount. The tenants are more alligned with the landlord here as they own half ie voids and non paying issues will be lower than normal BTL. And there is the chance a few buy the other half, but I have mentally set this windfall off against unexpected costs. Overall think this should be viewed as an equity investment into BTL with rental income of 3.5% growing at RPI +0.5% which is fine. However there is +/- property prices on top of that, and the bit that niggles me is they are capped on the upside (where the return terms are meet, presumably leaving above that for Hylo) but fully exposed to any downside.
  • Reading between all the lines on all the comments here i get the feeling that maybe ' watch and wait' might be the order of the day if you have potential interest. May just be the issue gets off to a poor start giving the chance to buy at under par. At the moment i'm still undecided so a 3-5% discount might help. !
  • Appears to have closed today as planned
  • >Issue Date: 29 October 2018
    >Total nominal amount of Bonds: £20,000,000*
    >Estimated net proceeds of the offer: £13,894,000
    >Estimated expenses: £780,000
    >*Of the £20,000,000 in nominal amount of Bonds due to be issued, £5,326,000 will >initially be held as treasury stock by the Issuer.

    That's quite a lot of unsold bonds (5,326,000 out of 20,000,000), indicates lower than expected demand, reflecting the sentiment of this forum.
  • Ps. it cost them quite a lot to get this issue away: 780000/13894000 = 5.614%
  • Ticker Code HEY1
    Pre-trading price = 100.38
  • I was thinking of going in on the secondary market to avoid having to sell some other stuff. Will probably do that if the price is attractive. If Heylo try to sell spare bonds into the market immediately, I guess that will help to keep the price down.
  • If anyone fancies any free money, you can currently buy this at 101 and sell it at 101.65 via HL (and presumably others)...
  • Two years or so from launch it's also an interesting investment for more long term investors who are worried about inflation in the future. There are a couple of other index linked corporate bonds but they all redeem next year. Whilst I didn't participate at launch I did buy some a few months ago at 97p in line with my strategy of "seeing how they go." What prompted me to buy was the fact they are trading at a discount to par value based on RPI inflation since launch. As per my original post the initial value for RPI they use is 278.1 from Feb 2018 (8 month lag). We now have the Feb 2021 inflation figure of 296 so if they had risen in line with RPI they would now be 106.4 (or 105.25 for inflation 8 months ago). Hence the discount as they actually trade at 101after a recent rise. I believe this effectively pushes the index linking up from the coupon of 1.625% above inflation to nearer 2% as at some point before maturity the price has to "catch up" with RPI. Still has the downsides discussed above and it is a fairly small issue with few trades. However the current price does seem more attractive compared to launch.
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