Applying value for money to funding

The cost of debt accounts for anywhere between 15 and 30 per cent of the outgoings of an average housing association (HA).

Yet remarkably little attention has been focused on how housing associations can ensure they obtain value for money on their debt.

At one level this is an issue of procedures. The capital markets offer a more flexible but less transparent and predictable source of funding than the long dated bank loans that were available to HAs in the past.

How did Cosmopolitan take decisions on its funding that led to failure?

These involved dealing directly with the lender, where it was relatively simple to compare front end fees, margins over LIBOR, covenant packages and differing repayment schedules.

Furthermore mandates were only awarded or paid for once the funds actually became available – i.e on signature of the loan document.

Unfortunately in the capital markets this has been replaced by the need to deal with a range of parties, some dealing as agents (lead managers – or arrangers as some advisors quaintly name it) and others acting as principals; while the final terms are generally only settled sometime after the mandate has been awarded.

It also involves choosing from a wider range of alternatives, where transactions are often difficult to compare, less flexible and more expensive to unwind.

In this environment, HAs are only able to rely on two things:

1.       The front end success fee being charged, and

2.       The charm, sales pitch, reputation, relationship and track record of the organisation appointed to lead the funding

All of these issues increase the importance of adopting a robust methodology for determining value for money; to ensure accountability on the decisions taken, accountability on the people advising or taking them and verification on the outcome.

It applies to both:

a.       Inputs; the process involved in determining the type of finance, choosing the lead manager, agreeing the covenants and so on, and

b.       Outputs; the type of debt, the margin obtained over gilts, the actual cost of the debt, suitability to the needs of the association and performance to benchmark or comparables.

In this process, the role of an adviser assumes an increased importance, to provide advice and support and to offer independent verification on what has been achieved.

In this respect, HAs run the risk of operating behind the curve.

In the equity market, it is normal to produce fairness opinions, statements designed to provide verification that pricing is appropriate to the circumstances involved.

Yet, in the HA sector advisers and lead managers are rarely, if ever, assume this responsibility by producing a statement for the board on value for money, an analysis of how and why this has been obtained.

How did Cosmopolitan take decisions on its funding that led to failure? And would a value for money statement have led to an entirely different outcome – or at least permitted the board to take action against the adviser?  

Perhaps it is time to learn from the corporate sector to adopt some of the practices adopted there to.ensure greater accountability on decision making over finance.