Bank of England opens COVID-19 liquidity facility to V2 associations after sector lobbying

News12 Jun 2020Luke Cross

Housing associations previously blocked from using the UK government’s COVID-19 emergency liquidity facility because of their V2 viability rating could now be eligible for the scheme, Social Housing can reveal.

HM Treasury has given Bank of England the green light to remove regulatory viability ratings from COVID-19 facility criteria (picture: Getty)

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Housing associations previously blocked from @bankofengland COVID-19 emergency liquidity facility due to V2 viability ratings could now be eligible for scheme #ukhousing #socialhousingfinance

Bank of England opens COVID-19 liquidity facility to V2 associations after sector lobbying #ukhousing #socialhousingfinance

The Bank of England’s (BoE) Covid Corporate Finance Facility (CCFF) was agreed with HM Treasury in March to support investment-grade businesses that make a “material contribution to the economy” alongside an extension to the Corporate Bond Purchase Scheme.

The CCFF involves the BoE purchasing short-dated, unsecured commercial paper at between 20 and 60 basis points over the sterling overnight index swap (OIS) rate.

The bank has bought more than £16bn of paper from 55 organisations to date, including £450m from two housing associations – L&Q and Optivo – while approving another £71bn for a further 155 businesses.

Businesses to use the facility include John Lewis, Greggs, Rolls Royce and Tottenham Hotspur Stadium.

However, as revealed in April, the scheme would consider only V1-rated housing associations and had rejected applications from providers with compliant V2 regulatory gradings, resulting in sector lobbying and calls for a rethink.

Social Housing has learned that HM Treasury – which owns the risk management framework of the scheme – has removed viability ratings from its criteria, albeit eligibility will still consider investment quality, revenue levels and a requirement that organisations make “a material contribution to the UK economy”.

Guidance on the BoE website was changed yesterday (11 June 2020).

It previously stated that the scheme was open to “large housing associations that continue to be assessed as V1 grade for viability from the Regulator for Social Housing” and that it will also assess housing associations’ revenue streams.

The revised guidance says: “The facility is open to large housing associations who will be assessed with reference, among other things, to their revenue streams.”

Associations with a G1/V2 rating have welcomed the change.

Peter Denton, chief executive at Hyde Group, said: “I’m extremely grateful to the regulator for facilitating a review. A reminder seemed to be needed that viability-compliant HAs typically have better external ratings than most others accessing the CCFF.”

Paul Phillips, group finance director at Notting Hill Genesis, said that the association is “delighted to see that the Covid Corporate Finance Facility has been made available to all registered providers regardless of their viability status with the regulator”.

Will Perry, director of strategy at the Regulator of Social Housing (RSH), added: “We welcome this announcement and are really pleased that all large, compliant providers can now apply to access the funding if they meet the BoE’s wider eligibility criteria”.

The V1/V2 distinction has been a debating point for several years as a number of developing HAs are moved to the second-highest compliant grading as part of the RSH’s recognition of the growing risk profile across the sector, first reported by Social Housing in 2017.

The bank is understood to have considered feedback from housing providers and sector representatives as part of its ongoing review of the CCFF with HM Treasury.

The BoE will continue to consider revenue streams of housing associations as part of the eligibility assessment, as an indicator of sufficient size and whether the HAs could access the commercial paper market in normal times.

Eligible issuers still require a minimum short-term credit rating of A-3, P-3, F-3, or R3 from at least one of Standard & Poor’s, Moody’s, Fitch and DBRS Morningstar as at 1 March 2020.

Those without a rating could also be deemed to have equivalent financial strength by their banks.

The BoE has also said that the criteria reflect “the underlying differences between corporates and housing associations, and associated risks, including the fact that housing associations typically rely on secured bank funding”.

HA drawdowns

While there are suggestions of more than a dozen HAs qualifying for the CCFF, the only ones to draw on the scheme to date are L&Q, which took the maximum available of £300m, and Optivo, which took £150m.

The money can be used to pay down revolving credit facilities (RCFs) and for working capital, and has a term of up to 12 months, albeit with the BoE remaining open to new purchases until 23 March 2021.

Martin Watts, treasury director at L&Q, told Social Housing that the ability to access the CCFF under the previous rules was a “strong reflection” of L&Q’s profile and speed at which it operates, with the results being additional working capital, headroom and flexibility.

L&Q’s profile puts it at the equivalent to A1/P1, which translates as a spread of 20 basis points against the OIS rate.

The money takes L&Q’s liquidity to £800m amid a move to extend its internal policy from 18 to 24 months.

One risk for L&Q to mitigate is its significant exposure to the sales market. But Mr Watts stressed that L&Q is not reliant on sales to meet covenants.

“It’s about mitigating risk and allowing us to have ample liquidity to absorb unforeseen risks – it’s not about us needing the money,” he added.

Asked whether there is any reputational risk attached to HAs using the emergency facility, he said access to the CCFF is a “positive”, showing the HA’s material contribution to the economy.

“It goes to show the speed at which L&Q operates; we have the right governance structure and we think quickly and proactively,” he added.

He said it also shows L&Q’s approach to disclosure and transparency with stakeholders.

Mr Watts said L&Q may be able to repay the borrowing through operations and sales receipts, rather than other forms of financing.

Other associations that have applied are understood to be using the CCFF as standby liquidity, which they can draw on if and when required.

But there has also been a suggestion that some have had issues around finding enough headroom on drawn RCFs to replace with CCFF funding.