Church Commissioners to offer rare religious exposure

4 min read
EMEA
Jihye Hwang

The Church Commissioners for England is preparing to make its first visit to the bond market with a sterling dual-tranche issue that will give investors a rare opportunity to get exposure a religious entity.

Leads Bank of America, JP Morgan and Morgan Stanley are arranging investor calls from Monday for the charity's proposed transaction, comprising a 10 to 16-year sustainability bond and a 30-year-plus conventional portion. Proceeds will be used for non-profit activities as well as eligible sustainable projects, including investments in renewable energy and affordable housing.

"This won't cause any ESG troubles that any fund manager running an ESG fund would be worried about, so it ticks all the right boxes," said a portfolio manager.

While universities and housing associations have been frequent borrowers in the sterling market, the charity's proposed bonds mark an unusual offering from a religious organisation, which also manages a £10.1bn investment fund. The rarity value as a "safe harbour" will provide a tailwind for the deal, if issued, although the funder of the broader Church of England sits between SSA and corporate.

"Whether it's a corporate or sovereign – it's like comparing Oxford and Cambridge [universities]. I suppose these kinds of names will find buyers with buy-and-hold mandates and certain managers holding proxies instead of Gilts will look at it," the investor said. "It's a new name with low risk and lack of leverage."

The deal is set to test demand at the long end of the curve when the broader risk tone remains sapped on worries over growth and inflation.

"It's an ultra-high-quality credit so they weren't probably worried if the market is open or not, while they may have taken a view that inflation would only push up government bonds higher and make issuing bonds 1%–2% more expensive in six months' time," said the portfolio manager.

The Church Commissioners' Aa1 rating by Moody's is helped by its high levels of liquidity with around three years of cash on hand as of fiscal 2021, according to the ratings agency. The spendable cash and investments to total adjusted debt was 6.9x.

"The deal will go extremely well – it's the kind of name that the sterling market really likes. I imagine there will be a mix of rates and credit investors," said a syndicate banker, who added that tackling the long end of the sterling market would be easier than in the euro space. There has been a dearth of supply of longer-tenor notes in euros this year with only one issuer, Dutch state-owned transmission system operator TenneT, printing a 20-year tranche in May. The deal was the first at that tenor since October.

"The bid for high-quality, long-term paper is there for sterling. It's not flighty like in the euro market."

A second banker away from the deal, however, said the demand will come with a price given that two-tranche offerings in the sterling market are "always a risky strategy".

"You need people to give focus because you're asking for a lot of interest on both ends of the curve. But the trade is very doable at a certain level, maybe around 100bp over Gilts," the second banker said. University of Cambridge's (Aa1, Moody's) October 2052s, for example, were bid around 117bp, according to Tradeweb.

While it's unusual to have three US banks on a sterling transaction, the second banker said the issuer could have run a process a year or two ago for the new trade, and the banks may have been advisers for the issuer's rating.