Housing Finance Snapshot #4 June 2021

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

Treasury committee report on net zero

Last month on International Mother Earth Day, the Commons Treasury Committee published its latest report on net zero and the future of green finance. The ‘Net Zero and the Future of Green Finance’ report followed on from the committee’s original decarbonisation and green finance inquiry:

The report and observations to the government and related bodies to help the UK to achieve net zero by 2050. These include:

• that the costs of decarbonisation are presently unclear and more detail is required about the government’s principles and strategy for funding the transition to net zero including an outline sectoral pathways towards decarbonisation
• highlighting initiatives that support the government’s net zero objective, including clear labelling of financial products to promote informed choices, prevention of greenwashing of financial products and tackling financial technology (FinTech) and regulatory barriers in order to promote green financial products and FinTech innovation
• the need for further attention to be given to pension funds that are invested on a default fund basis and the extent to which they are aligned with the path to net zero
• an acknowledgement that private finance will need to play a key part in funding the transition to net zero including a need for the government to provide long term and consistent climate change policy signals to investors
• commentary about the UK government being behind the curve in terms of issuing its first green sovereign bond which is scheduled for summer 2021, and
• a recommendation that the proposed framework for the new UK Infrastructure Bank should outline the mechanism for meeting the net zero target and clarify its governance arrangements, decision making process and plans for attracting private capital.

S&P Global Ratings publish request for comments on ESG principles

A request for comments has been published by S&P Global Ratings on its proposed methodology detailing the principles applied to incorporate environmental, social, and governance (ESG) credit factors into its credit ratings analysis. The intention of the proposed methodology is to increase the transparency of how creditworthiness can be influenced by ESG factors, and the criteria that would apply to ratings on all issuers and issues where it is understood that ESG credit factors may be relevant.

The deadline for responses is 17 June 2021.

Governor of Bank of England delivers speech on LIBOR transition

On 11 May 2021, the Bank of England published the speech of Andrew Bailey, Governor of the Bank of England, entitled 'Descending safely: Life after LIBOR', at the US Alternative Reference Rates Committee SOFR Symposium. The speech discussed the move away from LIBOR and amongst other things, it was noted that using robust overnight risk-free rates will help to create a more resilient and transparent financial system.

FCA publishes consultation on use of powers over use of critical benchmarks under the Financial Services Act

On 20 May 2021, the UK Financial Conduct Authority (FCA) published a consultation on how it proposes to use two new powers introduced through amendments to the UK Benchmarks Regulation (BMR) under the Financial Services Act 2021 to help reduce risk in the wind-down period before LIBOR ceases permanently.
The powers allow the FCA to designate a critical benchmark (such as LIBOR) as an 'Article 23A benchmark' where it has become permanently unrepresentative of the market it is intended to measure, resulting in an automatic ban on use of the benchmark as well as the ability to impose a change of methodology on such Article 23A benchmark. The consultation covers two powers:

• new Article 23C(2) of the BMR, which enables the FCA to permit some or all 'legacy' use of the benchmark
• new Article 21A of the BMR, gives the FCA the ability to prohibit some or all new use of a critical benchmark when it has been notified by its administrator that it will cease to be provided

The factors that the FCA propose to consider when making decisions to exercise these two new powers are set out in the consultation.
The responses will advise the FCA's Statements of Policy and will be published in Q3.
The deadline for responses is 17 June 2021.

The LMA publish updated Sustainability Linked Loan Principles

Further to the publication of the Sustainability Linked Loan Principles (SLLP) in March 2019, there has been an astonishing increase in the book of sustainability linked loans seen across the syndicated loan market. The LMA have now the published a revised version of the SLLP and accompanying Guidance on Sustainability Linked Loan Principles (SLLP Guidance).

The key amendments seek to further encourage the transparency and integrity of the sustainability linked loan product, by tightening the language regarding the selection of key performance indicators (KPIs) and the scope of sustainability performance targets (SPTs) to provide greater clarity on the expectations related to them. The revised principles have now made mandatory the need for independent and external verification of a borrower's performance level against each SPT for each KPI.

In order to ensure a consistent approach to other sustainability linked financial products, the revised SLLP have been adjusted to align with ICMA's Sustainability Linked Bond Principles.

Social Housing Finance Conference 2021

Our Housing Finance team attended this year’s Social Housing Finance Conference in May, key takeaways of which included:

• a general consensus that the housing sector has demonstrated resilience and flexibility in the face of the pandemic, underpinned by a period of low interest rates, a buoyant housing market and a return to inflation linked rents;
• the expression of some medium to long term concerns from the Regulator and others as the furlough scheme wraps up, the impact of Brexit becomes more clear and interest rates begin to rise again;
• associations are facing a triple whammy of costs pressures driven by building safety, decarbonisation and increasing supply;
• some associations are looking to make the most of their loan books, security and expertise by considering refinancing, uplifting values, rationalising stock, selling shared ownership properties, merging with other associations and partnering with For Profit providers; some are even setting up their own;
• mergers continue to be a viable solution to increase borrowing capacity and accessibly increase long term debt;
• the sector’s strong credit rating continues to be an attractive asset class for investors and, unsurprisingly, “ESG investment” was a key theme at the conference with low borrowing rates linked to sustainability KPIs;
• the importance of having a long term strategic finance plan focused on maintaining and delivering safe and high quality homes to its tenants;
• risk mitigation, communication and collaboration remain key considerations; and
• additionality was a key theme as a means of increasing funding capacity and delivery of affordable housing but the Regulator emphasised that it is incumbent on boards to be clear about the rationale benefits of considering innovative funding models.

If you would like to discuss any of these issues in more detail, please contact Our Banking & Finance Team

AOB
What can we learn from governance downgrades?

15 July, 12.00-1.00pm
In partnership with DTP

As housing association structures, activities and funding become increasingly complex, we are creating a ‘‘fit for purpose structures’ webinar series. Each webinar will consider various topics, from joint ventures to mergers, to enable you to equip yourselves with the most suitable corporate, governance and funding structures to achieve your strategic objectives.

Join us on 15 July for our second webinar, as our panel review previous regulatory downgrades and what they teach us - including how good governance is central to managing sustainable growth and change: learning the lessons from the past to inform your plans for the future.

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