What is the optimal treasury structure for a housing association?

Liquidity: zero to five years, core facilities

Liquidity remains essential for managing day-to-day operations and responding to unexpected events. Strong levels of liquidity remain a defining prudent feature of the sector, but associations need to strike the right balance between cost and business need.

Sufficient liquidity headroom will vary between associations but should meet treasury management policy requirements and is unlikely to be drawn.

Beyond this, a level of liquidity is needed to support credit rating profiles, provide headroom to meet short-term borrowing requirements, and offer a buffer to manage operational volatility.  

It is likely that requirements will fluctuate over time, particularly if there are material changes to investment programmes.

Revolving credit facilities (RCFs) continue to be the most effective and lowest-cost form of liquidity.

These facilities are generally secured, but where liquidity requirements are likely to peak for a short period, an element of unsecured RCF may be a prudent ‘top layer’.

Unsecured facilities are usually more expensive to draw, but comparable to secured RCFs to hold undrawn as security charging costs are avoided.

Short to medium term: five to 10 years – in vogue

Having some drawn debt that is shorter term and easier to pay down ensures that associations can adapt to changing conditions. If development had to cease, and cash built up, such facilities can be repaid more readily, offering valuable flexibility.

Typically around five to 20 per cent of an association’s drawn debt might fall under this heading, allowing associations to adapt to changing conditions without assuming too much risk.

Bank facilities are the mainstay here, with reasonable market depth at tenors between five and 10 years and often a range of hedging options offering flexibility.

With all-in rates elevated, many associations have opted to add debt into this bucket in the past year.

This is usually on a fixed-rate basis to both minimise interest rate volatility and reduce the cost of carry by taking advantage of the lowest fixed rates at the eight to 11-year tenor.

The market view on long-term rates has been volatile, but with at least one base rate reduction still expected this year and a stubborn gilt/swap inversion >10 years, the focus on shorter tenors is expected to remain.

Capital market funding at these tenors is unusual, but demand from investors is outstripping issuer supply and driving tighter spreads. Some debt capital markets options are coming into contention, with several <10-year private placements or bonds now in train.

Long-term fixed-rate debt: 10 plus years – not down and out

With a long-term fixed asset base and limited control over revenue, the majority of an association’s debt should be long-dated and fixed-rate – often >80 per cent.

This minimises refinancing risks, reduces volatility in financing cash flows and locks in returns from investments or developments.

Stable by nature, this debt remains relatively inflexible, with potentially high costs to restructure. It is important to secure it on a covenant-light basis to minimise the risk of costly renegotiations in the future.

The tenor of bank facilities on offer has been growing over the past few years, but the market for tenors >10 years is very thin.

Covenant-light capital market facilities are the mainstay, and with some pent-up borrower demand and tight spreads, we expect large-scale issuances to gain momentum over the next 12 months.

Where this does occur, there will be a laser focus on finding the lowest all-in-cost option that meets requirements, with potential for more unusual transactions.

Paradigm’s recent sub-benchmark bond priced broadly in line with where a benchmark issuance should have, and well inside expectations for a private placement.

What do we conclude?

At the heart of good treasury management is an ongoing balancing act between cost and risk.

Associations must consider liquidity, debt duration and flexibility when assessing their optimal treasury structure, while being ready to adapt the proportion and composition of funding in response to conditions and trends.

Liquidity facilities remain a critical component of the capital stack, with drivers other than merely the policy requirement coming to the fore. Where requirements are volatile, an unsecured top slice that may be transitory could offer value.

The balance between long-term and mid-term funding is nuanced and when rates are elevated, the all-in-cost of debt is a key decision driver.

While a little out of favour, the capital markets are not down and out, with increasing market demand at shorter tenors offering more choice to associations.

John Tattersall, managing director, and Tom Miller, assistant director, Centrus