Housing Finance Snapshot #3 May 2021

Welcome to our third 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.

Optimal Property Charging

Our new Housing Finance Partner Jessica Church takes a look at the advantages of a strategic approach to charging

The Regulator of Social Housing has recently forecast an unprecedented reliance on debt over the next 5 years to fund housing association development programmes in addition to tackling the rising cost of decarbonisation targets and building safety; it is estimated that £41 billion pounds of new debt facilities will be required over this period.

In light of converging financial pressures in the market, there is a critical need for associations to have sufficient liquid assets to deploy into the delivery of their business plans to meet market, statutory and regulatory demands. There is no better time for housing associations to have access to flexible and clean property security to take advantage of new investment opportunities at historically low borrowing rates.

In order to meet this challenge, an increasing number of housing associations are looking at optimising their security portfolios by establishing ongoing or “rolling charging” programmes. The fundamental aim of rolling charging is to minimise the risks in transactional funding projects in terms of time and cost savings. Advance preparation can eliminate the majority of stumbling blocks in the charging process, resulting in the smooth negotiation of security documentation and avoiding leakage of security or securing at an undervalue.

The approach to rolling charging can be flexible. Some housing associations will require a preliminary “health check” exercise in order to ascertain a high level valuation estimate and to assist with structuring funding requirements. For other associations where there is less surplus security to play with, a comprehensive “red amber green” traffic light analysis may be appropriate to flush out any barriers to chargeability and to securing maximum valuation. A stage further is to carry out a programme of rectification work in order to produce a clean portfolio in advance of a live transaction.

You can read more about the multi-faceted advantages of a rolling charging programme for housing associations in Part 1 of Jessica Church’s series: A Guide to Optimal Property Charging.

LMA: Social Loan Principles

Another funding option for RPs?

The Loan Market Association have recently developed and published the Social Loan Principles with the intention of promoting the development of a social loan product. This adds to their suite of framework documentation for Green Loans and Sustainability Linked Loans, which have already proved helpful in guiding ESG deals in the sector.

The Social Loan Principles relate to loans which are being used for a specific social purpose and provide a high-level framework of market standards and guidelines which can be adapted to suit the specifics of individual transactions, alongside providing a consistent methodology which can be used across the social loan market.

The fundamental determining factor of whether a loan is a social loan is the utilisation of the loan proceeds for social projects. The principles state that all designated social projects should provide clear benefits of a social nature, which will be assessed, quantified, measured and reported by the borrower. A non-exhaustive category of "Social Projects" is provided in the appendix to the Social Loan Principles and includes Affordable Housing as one of the main categories. At first glance you would be forgiven for thinking all loans in the sector would therefore meet this criteria for a Social Loan. In practice however most loans are for general corporate purposes, meaning that whilst an RP may use some of the funds for development of affordable housing, the proceeds are not targeted towards a specific project or projects and the necessary reporting requirements are not met. That approach may change if it opens the door to wider finance opportunities and the Social Loan Principles will be helpful to consider.

Overcoming barriers to ESG investment

Sticking with the ESG theme, Louise Leaver recently wrote an article for Housing Executive setting out three key pieces of advice for RPs seeking to take advantage of the growing interest from investors in this area. As always the sector has taken a collaborative approach to new challenges which resulted in the development by the Good Economy together with RPs and lenders in November 2020 of The Sustainability Reporting Standards, which Bevan Brittan are proud to endorse. They provide a very useful framework to identify the information that will increasingly be required by investors as a matter of course.

LIBOR: a call to action

Following the recent FCA announcement confirming the cessation of most LIBOR settings on 31 December 2021, on 14 April 2021 we hosted a webinar jointly with DTP looking at the current position in the loan market on the transition to SONIA and discussed the practical steps registered providers should now be taking.

We conducted a series of polls during the session to gauge progress of the transition across the sector, and the routes being taken to document it. These provided some interesting results based on a sample of attendees at the webinar who were mainly registered providers, and suggest that whilst the deadline for transition at the end of Q3 is rapidly approaching, none of the participants have yet agreed documentation to effect the transition, although some have entered into SONIA loans as part of broader restatements of their facilities. As we heard from Andy Gladwin at DTP, if you have not received any communication from your lenders, it is time to take the initiative, reach out and engage. Please get in touch if you would like assistance reviewing any transition documentation you have received.

Consultation: strengthening the UK’s audit framework

Closing Date: 8 July 2021

The Department for Business, Energy & Industrial Strategy has started a consultation on strengthening the UK's audit and corporate governance framework. The proposals intend to increase quality and choice in the audit market, further clarify responsibilities for detection and prevention of fraud, and improve company reporting on risk, assurance and internal controls. Part of this includes a proposal to widen the definition of a 'public interest entity' so that appropriate regulation is applied to businesses which are of public importance.

Public interest entities are currently defined as:
• entities whose transferable securities are admitted to trading on a regulated market
• credit institutions, or
• insurance undertakings.

However, the proposal of the consultation is to consider the public interest in corporate entities more broadly and to include large companies within certain size limits regardless of whether they are admitted to trading on a regulated market, which would potentially expand the number of RPs caught by the definition beyond those with public bonds. For further details, please see our latest Company Secretary Snapshot.

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