13 HAs back £1bn borrowing vehicle

Stage one has consisted of a 34-page report commissioned by the sponsors and produced by JCRA and Allen & Overy, setting out the ‘substantial benefits’ to creating a borrowing vehicle for the sector.

 

Stage two will begin after the Housing 2017 conference in Manchester later this month, when the plans will be presented. It will involve bringing a ratings agency on board and conducting discussions with the likes of the National Housing Federation and the sector’s leading bond aggregator, The Housing Finance Corporation (THFC).

 

It will also include assessing a suitable structure for the next stage of development, and going out to attract a wider group of HAs.

 

The financial support provided by sponsors to fund the initial stages would be converted into the equity of the SPV and repaid out of future dividends.

 

Adrian Bell, director and head of social housing at JCRA, said one of the aims is to relax the process for charging security, thereby eliminating the delays HAs suffer on approaching the market.

 

It would also provide speedier and simpler access to the market and create more straight-forward loan documents for the HAs to cut out ‘vexatious’ covenants. He said using an MTN means ‘creating a new, more flexible approach to the market’. It would initially expect to lend long-term to HAs on a secured basis - though shorter dated and unsecured debt might be issued.

 

Mr Bell said HAs are currently ‘paying an enormous premium’ for not being able to use an efficient structure of this kind. He set that in the context of £500m raised by associations in private placements last year, which he said are ‘expensive and inefficient’ and price at 160 to 200bps over gilts, while the likes of L&Q have bonds closer to 80bps in the secondary market.

 

Others see placements as less onerous than public issues, while offering a bilateral, long-term relationship with funders and more flexibility around structure.

 

But Mr Bell added: ‘The broader investment market find the HA sector very frustrating because it is generally looking for large, liquid and highly-rated issues…while most HA issues are small, relatively illiquid highly rated issues.

 

‘So there’s a disconnect between what HAs need to have and what the market wants to provide.

 

‘The consequence of that is HAs are paying a bigger and bigger illiquidity premium when going to the market - and in tandem, fewer and fewer investors are really willing to provide that debt at a reasonable price, so the whole market is becoming increasingly constrained.’

 

He added: ‘I think the market is saying to borrowers that we need a solution like this.’

 

Mr Hadden said he is mindful of the role the sector has in contributing to the development of the new homes the country needs and has been interested in different ways to raise finance.

 

He said: ‘The work we have done to date in researching what a sector-wide borrowing vehicle might look like and the benefits it could bring have been very promising. I hope other associations will now join with us as we move into the next stage of its development.’

 

Mr Bell stressed that the vehicle would not be competing with the sector’s main aggregator, THFC, but leveraging on its strengths while sidestepping its restrictions in the form of an historic trust deed, particularly around security cover levels of 1.5x.

 

Piers Williamson, THFC’s chief executive, said given the scale of the financing and refinancing needs in the sector, it is important associations have ‘as wide a choice as possible’. He agreed that some investors are ‘taking advantage of a relative lack of choice’ and private placements are ‘above market rates’.

 

He added that while THFC’s nominal asset cover is 1.5x on a MV-T basis, issuing taps of THFC Funding 3 at a premium currently improves asset efficiency, based on the cash proceeds, to make participation more competitive than own name bonds.

 

THFC is also the parent of Affordable Housing Finance, which has delivered debt via the UK government’s guarantee scheme at record low rates, but is now closed to new participants.