‘It’s not something we would ordinarily do’: why the RSH made a payment to a failing provider

More than two decades apart, both interventions are what the credit ratings agencies might refer to as an example of ‘extraordinary government support’. That is, special assistance from government for social housing providers in need, the expectation of which in some cases leads to an uplift of providers’ credit ratings.

 

The financial support from the regulator has now been repaid in full. But what was it used for? And what compelled the regulator to take out its chequebook in this instance, as opposed to brokering a rescue merger, and/or a loan from another party where financial assistance was required?

 

For example, in the case of Swan, a loan was made to the struggling provider initially by its would-be rescue merger partner Orbit and latterly, when that partnership was abandoned, replaced by a larger loan from its eventual rescuer, Sanctuary. The two landlords completed their merger in February.

 

Rapport: the case

 

Registered with the RSH since 1977, the provider now known as Rapport Housing and Care had previously been called The Abbeyfield Kent Society, until a name change in 2017 when it left the eponymous movement and became independent.

 

Because it is a small provider (at the time of the 2022 Statistical Data Return, it held just 476 units of social housing), Rapport does not have regulatory gradings.

 

Meanwhile, as a provider of supported housing and extra care for older people, as well as operating care homes, Rapport’s financial accounts in recent years are not alone among such providers in having cited the challenges posed by the COVID-19 pandemic and the associated restrictions and pressure on staffing requirements.

 

However, the occupational hazards of a low-margin sector alone do not explain the organisation’s financial woes. In its 31 March regulatory notice, the regulator concluded that through a “lack of effective board oversight and management of its key risks”, Rapport had shown a “fundamental failure of governance”.

 

The RSH, which added Rapport to its gradings under review list on 30 January 2023, said in its notice that it had begun investigating potential viability issues at the provider after Rapport revised its cash flow forecasts to incorporate better-informed assumptions. These revealed “material financial concerns”.

 

Rapport had misunderstood its funding obligations and was now facing issues with its secured creditor.

 

Rapport’s “significant” short-term liquidity issues resulted in it being “unable to implement its proposed strategy of exiting and disposing of its care operations, including its involvement in a long-term lease arrangement, to improve its financial position and maintain its liquidity position”. 

 

Ultimately, the failures meant that social housing assets were at risk.

 

“Rapport has failed to assess, manage, and address risks to ensure its long-term viability, including ensuring social assets are protected by carrying out detailed and robust stress-testing, and before taking on new liabilities, ensuring it understands and manages the likely impact on current and future business and regulatory compliance,” the notice said.

 

Regulatory intervention

 

The regulator made three statutory appointees to Rapport’s board, with experienced professionals drafted in to strengthen the skill and capacity of the board and “provide the necessary support to manage its financial position, ensure its tenants remain safe and ensure appropriate governance functions are maintained”.

 

The appointees, who joined the board in the middle of February, were Waqar Ahmed, group finance director at L&Q; Louise Hyde, company secretary at Clarion; and Sara Keetley, who was operations director at Sanctuary Supported Living until her retirement last year.

 

So with experienced sector heavyweights on board, why was direct financial support from the regulator seen as the best solution, and what problem specifically was being solved?

 

Mr Walters explains: “We did it because we could see a very clear route through, where putting some short-term liquidity support in would stabilise the position, secure it, and we’d be able to get our money back.

 

“So just like in West Hampstead [Housing Association], where the government put the overdraft guarantees in place, but they never got used. In this example, we did extend £670,000 to them, but we’ve now got that money back.

 

“And what we’re really keen to emphasise is that Treasury, government, is not offering an open underwriting of any risk a provider gets itself into.”

 

In total, government, via the RSH, could have given up to £1m to Rapport, with the full amount drawn – £670,000 – now repaid.

 

Mr Walters refers to the recent example of Swan, which completed its merger with rescuing partner Sanctuary in February. That too is a case, Mr Walters says, in which “you could have argued that the government should step in and provide support to Swan”.

 

He adds: “But clearly that wasn’t the right answer. The right answer was for Swan to be big enough to trade its way through, and then Sanctuary eventually to step in.

 

“So it’s not something that we would ordinarily do. And we need to be confident with value for taxpayers’ money. So it’s not straightforward at all. The balance of what we will do and what we won’t do will depend very much on the case itself. And what we’re not doing is offering any guarantees.”

The need for cash

 

So is this a cautionary tale about poor risk management, or simply the perils of the low margins of the care sector with a pandemic thrown in?

 

A combination, it would seem.

 

“I think it’s a hard business to be in, the care business,” Mr Walters says. “And if you don’t manage it really well, then you get into trouble quite quickly.”

 

At Rapport, that situation came to pass after the association’s financial health began to be hit from all sides.

 

On one hand it had previously entered a long-term lease deal within its care operations, as one of several steps taken in successive years to address an ageing portfolio of properties in need of capital investment. In a company history on its website, Rapport notes that it had been approached in 2013 by a company with plans to develop a new care home on a site near to one of Rapport’s legacy homes, Woodgate in Tonbridge, that “required urgent major repairs and modernisation”.

 

The website adds: “We did not have the funds for this scheme; however, it was essential we established a partnership as it would have accelerated Woodgate into closure. Mindful of this, we agreed a build and leaseback partnership.”

 

Rapport’s 2017 accounts show that a 30-year operating lease on the “purpose-built residential care home”, known as Barnes Lodge, was formally entered in August 2016.

 

The lessor and owner of the property is a real estate investment trust called Target Healthcare REIT. According to the website for the investment firm’s fund manager, Target Healthcare REIT provided 100 per cent of the funding required for the development, up to a maximum commitment. This then converted to “a long-term occupational lease once the property reached practical completion, with rent payable quarterly in advance and subject to annual uplifts linked to RPI”.

 

Rapport’s accounts to 30 September 2021 show, as at that year end, the association had commitments under “non-cancellable operating leases” totalling £24.8m. This comprised £1m due within one year, £4.1m due between one and five years, and £19.6m due after more than five years (figures rounded).

 

The commitments sit against the backdrop of an operating deficit for Rapport as an organisation of £334,657 for the year – or an underlying operating deficit of £456,031 when excluding the surplus from property sales during the year.

 

A breach of debt service covenants in recent financial years also meant that Rapport was now needing to report its long-term bank loans as short-term debt. The 2021 accounts record amounts falling due within one year to its creditors of £19.3m – primarily boosted by £14.3m of bank loans. In explanatory notes, the provider explains that all its bank loans due to main lender Triodos, a Dutch bank, all of which are secured against property, have been disclosed as repayable within one year as a result of its “debt service covenant breach as at the year end”. It cites the impact of the pandemic on care home occupancy as the cause of the breach.

 

“Triodos are aware of this breach, and issued a formal covenant waiver letter following the year end. Notwithstanding this breach bank loans are repayable over 25 years at fixed and variable rates subject to a minimum variable lending rate of 2.5 per cent (including margin),” the note adds, with £640,679 due between one and two years, £2m between two and five, and £11m after more than five years.

 

While the value of the bank loan repayments to Triodos total £13.7m over 25 years, carrying value of the properties charged to Triodos is recorded in the same report at nearly three times this, at £37.6m.

 

Liquidity crunch

 

Rapport’s accounts over several years show an asset disposal programme to divest properties that have been vacated or closed due to concerns regarding their financial viability.

 

As the provider’s regulatory notice details, these proceeds had been intended to be used to improve its financial position and maintain its liquidity. However, by misunderstanding its obligations to funders, these proceeds could not be used to this end – putting at risk its ability to continue as a business while further sales of vacant properties were completed, and ultimately putting the security of tenanted homes at risk.

 

The support provided by the RSH allowed Rapport the time to sell the properties, for which buyers were already lined up, to generate the cash to pay off its bank loans.

 

As far as regulatory processes go, the intervention was swift. Following the investigation into Rapport after the publication of its 2021 accounts in autumn 2022, the payment had been arranged by February 2023.

 

It was not the only route the regulator explored.

 

“We did look and speak to a number of the big providers and what we found was that because of the leased asset, they were all very nervous about taking it on,” Mr Walters says.

 

However, Peabody was willing to take on the tenanted social housing assets, through its subsidiary Town & Country Housing (TCH). 

 

In June, five housing schemes including four extra-care schemes and one supported housing scheme transferred to TCH, with Rapport at the time retaining its care homes including the leased asset.

 

Rapport’s secured bank funder, Triodos, was repaid, and no longer has any debt with it.

 

Mr Walters said: “What our support did essentially was allow Peabody the time to do the necessary due diligence and assure themselves they were sensible things for a charity to be doing.”

 

With the tenanted social housing properties now at Peabody and support from government repaid, the case is “now effectively closed”, Mr Walters says.

 

Meanwhile, the (non-social) lease on Barnes Lodge has now been transferred to a care provider outside the social housing sector, Avante Care & Support. Target Healthcare REIT remains the owner.

 

A spokesperson from Triodos Bank UK says: “As a sustainable bank, we have been financing housing projects for over 40 years, with a focus on housing associations, community-led housing, co-housing and similar housing solutions.

 

“We were very sorry to see what happened to our customer, Rapport Housing and Care, this year and have done everything we can to support them while following the due process. We remain committed to the social and affordable housing sectors, knowing the issues they face.”

 

Target Healthcare REIT, Avante Care & Support and Peabody were approached for comment. Rapport Housing & Care could not be reached.

 

Powers to intervene financially

 

When the sector’s regulatory body – then known as the Housing Corporation – made its last financial intervention in the sector, to West Hampstead Housing Association in 1999, it was to help an association that had become unstuck over some onerous leases within its temporary accommodation provision. Mr Walters, who was not at the regulator at the time, says: “It was running out of cash, and because the [properties] were on very short-term leases, the tenants had to be out before Christmas.”

 

To support the organisation and prevent this happening, the government put in place £3m of overdraft guarantees for the failing association, which in fact were never used. The association later became part of Genesis Housing Group (now Notting Hill Genesis) in 2002.

 

Mr Walters feels that the regulator’s current legal powers are sufficient to support its ability to intervene in this way. “We’ve got a range of powers. Our issue is, of course, we [as the RSH] don’t actually have any money. So it does depend on the government having the fiscal willingness to provide extraordinary support. And I think both times, when it’s done it, it has done it because you can see a clear route through to resolution, and you can see how the money is going to protect individual tenants. And it’s kept the sector healthy – everyone’s got their money back.”

 

In the case of Rapport, that included the fact that Homes England grant contained within some of the redeveloped properties was also protected. Rapport’s accounts show a £14.5m total of social housing grants received as at 30 September 2021, from agencies including Homes England.

 

Engagement with government to make the support amounts available to Rapport was “really positive”, Mr Walters says. “We engage with the Department [for Levelling Up, Housing and Communities] regularly, but we were talking to them early on about this case. We could see it had the potential to go wrong but that also, there was a very clear way through this, as long as we could get sufficient liquidity into the organisation to allow them to continue trading.

 

“So we were able to have a very compelling case that we can go in with some support, strengthening the board, and we should be able to get our money back at the end. Although there’s obviously a risk; you can never guarantee.”

 

The other path?

 

What, then, might an alternative solution have looked like in the Rapport case?

 

“If we hadn’t provided the support, a moratorium would probably have been triggered. And then we’d have had the choice about whether we applied for a housing administration order,” Mr Walters says.

 

“But I think what we concluded pretty quickly was actually the cost of running a special administration was probably more expensive than putting in liquidity support.

 

“Administrations can be very expensive affairs, and there was a real question about who would pay for administration. Would it be the regulator? Would it be the secured creditor? We have to take care to turn to special administration only when the circumstances are appropriate, and we were confident this was the best way of doing it.”

 

A duty of care

 

The regulator is now in the process of deregistering Rapport.

 

That being the case, what advice might the regulator give to other small housing associations, particularly those operating in low-margin markets, in challenging economic conditions?

 

“If you’re on the board of a small housing association, you have a real duty of care,” Mr Walters says. “Often these are very long-standing organisations, and you have a real duty of care to the organisation and to your tenants about entering [agreements]. And it’s that classic thing, that if it seems too good to be true, it almost certainly is too good to be true.

 

“So you’ve got to get the right advice. And often you’ll find that some of the bigger housing associations are willing to help with that and offer that advice and support. The National Housing Federation, too – there are places you can go to get some of that advice and support, as well as obviously paying for proper legal and due diligence advice.”