Housing Finance Snapshot #2 April 2021

Welcome to our second edition of Housing Finance Snapshot - a regular newsletter providing banking and finance updates and opinion for those based within the affordable housing and local government sectors.

LIBOR: override agreements

We have now passed the Q1 deadline in the Working Group on Sterling Risk-Free Reference Rates 2021 Roadmap beyond which lenders should cease initiation of new LIBOR-linked loans and should have completed identification of all legacy LIBOR loans that need to be converted.

As we move into this new phase for transition, we are starting to see override agreements being produced by lenders to document the transition to SONIA. By using an override agreement, LIBOR is replaced with SONIA in the underlying loan agreement by generally removing and clarifying terms in the document as a whole governing the calculation of interest, rather than pinpointing specific clauses within the document as would normally be the case with an amendment and restatement. The override approach is intended to simplify the process and should (from a lenders perspective) ensure consistency across their loan documentation. However, we are still seeing different lenders taking different approaches to the documentation so there may not be consistency from a borrower’s perspective across all loans. Our team can assist in reviewing override agreements – please do get in touch if you would like to discuss an override agreement or the transition process more generally.

Watch our LIBOR webinar on practical next steps.

Zero carbon: pressure on interest covenants?

As borrowers begin to prepare business plans to document the costs of converting to zero carbon emissions, some borrowers are starting conversations with lenders about potential carve-outs for decarbonisation costs within interest cover covenants. As an EBITDA-MRI interest cover ratio requires borrowers to deduct capitalised investment from surplus generated, which surplus is then in turn measured against interest payments, the impact of spending on repairs to bring properties to a carbon-zero position will be seen when calculating this covenant. This concern can be applied to costs for retrofit generally as well as for building safety costs.

Savills have estimated that the costs of decarbonising stock could lead to £3.5 billion being invested by the social housing sector annually. As such costs are unlikely to directly generate additional income, this pressure has led to such conversations with lenders. Carve outs for fire safety costs in the immediate future are being discussed, particularly as these costs are likely to be incurred in the next 3-5 years, whereas retrofitting and decarbonisation capital costs are likely to have a visible impact over a more long term period and it may be harder to quantify headroom required to ensure covenants are not breached over a longer period in respect of these costs.

TCFD Roadmap

The Government launched a consultation on mandatory climate related financial disclosures for large UK listed companies, large private companies and LLPs on 24th March. These proposals are based on the Task Force on the Climate related Financial Disclosures (TCFD) framework and are in line with the path set out in the Treasury's November 2020 interim report and roadmap and the expectations set out in the Government's 2019 Green Finance Strategy. The consultation closes on 5 May 2021. The proposals are that from 6 April 2022, UK entities within the scope will have to make climate related financial disclosures in their annual report or strategic report, with such disclosures to be in line with the TCFD recommendations relating to Governance, Strategy, Risk management and Metrics and Targets. The intention is to increase the proportion of corporates that will provide investors with the information they need to understand and manage climate-related financial risks and provide stakeholders with a greater level of related information. The proposal within the consultations is for legislation to be passed by the end of 2021, with such legislation to come into force on 6 April 2022 to apply to accounting periods starting on or after that date.

Whilst most RPs may not be directly impacted by these requirements, they demonstrate the increasing interest in reporting requirements which will no doubt need to be taken into account by all corporate entities including RPs.

HMRC as preferential creditor from 1 December 2020

Of relevance for RPs who have taken floating charge security in the context of intercompany loans or JV arrangements, there has been a change to HMRC’s ranking as a preferential creditor.  As of 1 December 2020, HMRC is treated as a preferential creditor for certain taxes (rather than an unsecured creditor), including PAYE, VAT, employee National Insurance Contributions and Construction Industry Scheme deductions under the Finance Act 2020 (the Act). If a company enters administration or liquidation, this means that HMRCs claims for such taxes will rank ahead of those of a floating charge holder but after employees' preferential claims. The practical impact of these changes on floating charge holders means that any monies secured by a floating charge will only be paid once such taxes have been paid to HMRC. This could accordingly reduce the realisations available to a floating charge holder, and such legislation does not specify an age or amount of debt owed to HMRC that will be subject to the changes, so the legislation applies retrospectively to tax debt owed prior to 1 December 2020 where a company enters the insolvency process on or after 1 December 2020.

Companies House filing requirements - end to extensions

The automatic extensions granted by the Corporate Insolvency and Governance Act have come to an end for filing deadlines that fall after 5 April 2021, meaning that there will be no further automatic extensions for confirmation statement filings, accounts filings and event-driven filings after 5 April 2021, and so these documents will now have to be filed in accordance with their previous usual deadlines. For mortgage charges created up to and including 4 April 2021, the automatic extension of 10 extra days to file the particulars of a charge (making it 31 days to file) will continue. Mortgage charges created after 4 April 2021 will not receive an automatic extension, and so the charge will need to be registered within 21 days as per the regime before Covid. The 21-day period starts the day after the charge was created.

Webinars

If you were not able to join us live for some of our recent webinars, you can now watch them on demand:

• The Essential Housing Update
• A landscape of Change: the future of the built environment
• The practical guide to Environmental, Social and Governance (ESG) for housing associations

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