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Market Commentary

Bank of England expands QE program, Libor falling steadily, healthcare funding improving.

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;

1. 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.
   
2. 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.

In current markets, our brokerage services are more valuable than ever, as we know which Banks still have funds to lend. If you would like a no obligation review of your current position, we would be delighted to talk to you to see if we can help. If we cannot, you at least have the reassurance that you are well positioned with your funding.

David Burrows
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David Stephen Partners is an appointed representative of Sesame Ltd, which is authorised and regulated by the Financial Services Authority.Sesame Ltd is entered on the FSA register (www.fsa.gov.uk/register/)under reference 150427. The Guidance and/or advice contained within this website is subject to the UK regulatory regime and is therefore targeted at consumers based in the UK.