Bank of England rejects housing association applications for COVID facility due to V2 ratings

News30 Apr 2020Luke Cross

The Bank of England (BoE) is being lobbied by sector representatives after it denied some housing associations access to its COVID-19 financing facility on the basis of their regulatory V2 ratings, Social Housing has learned.

Bank of England has told HAs with V2 ratings that they do not qualify for its COVID financing scheme (picture: Getty)

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The Bank of England has rejected applications to its COVID-19 financing facility by some of the sector’s biggest housing associations on the basis of them having a regulatory V2 rating, @HousingMagazine has learned #ukhousing #socialhousingfinance

.@HousingMagazine has learned that the Bank of England is also rejecting HAs’ applications to its #coronavirus financing facility because of their size #ukhousing #socialhousingfinance

It is also understood that the BoE is rejecting some housing associations (HAs) because of their size, with a requirement under the initiative that it will only support organisations that make “a material contribution to the UK economy”.

The Covid Corporate Finance Facility (CCFF) was set up by the BoE and the UK government as one of a raft of measures to support businesses and the economy during the pandemic, alongside the doubling of the Corporate Bond Purchase Scheme (CBPS) to £20bn, which already includes housing association issuance.

The CCFF was launched predominantly to relieve cash flow pressures on investment-grade businesses that may need liquidity support throughout the coronavirus crisis.

It would involve the BoE purchasing businesses’ commercial paper – defined as an unsecured, short-term debt instrument issued by a company, with a maturity anywhere between a week and a year – to help them with cash flow, and to pay wages and suppliers.

As first reported by Social Housing at the start of April, a number of HAs have been applying and qualifying for the scheme, despite the sector being broadly seen as having sufficient liquidity at present, both through regulatory requirements and preparations last year for a no-deal Brexit.

Many have sought to take advantage of the facility’s all-in pricing, which is understood to be in the range of just 30 to 60 basis points, calculated at a margin over SONIA.

However, it has now emerged that HAs with V2 ratings have been rejected by the central bank.

One HA figure described the decision by the BoE as “entirely illogical”.

“We have better external ratings than most of the other sectors seeking access to it. Indeed V2 HAs often have better ratings than the banks themselves.

“The implication of this is that it further encourages V2 organisations to cease all development and focus on regaining V1, especially given the sector’s financial commitment to building safety and the green agendas.”

V2 is the second-highest available grading for financial viability, and means that the provider is compliant, meets requirements and has the financial capacity to deal with a reasonable range of adverse scenarios, but that it needs to manage material risks to ensure continued compliance.

A V1 rating, meanwhile, means the provider meets the regulator’s viability requirements and has the financial capacity to deal with a wide range of adverse scenarios.

There has been much debate in sector after a number of larger developing HAs were moved to V2 as part of the Regulator of Social Housing’s recognition of the growing risk profile across the sector, first reported by Social Housing in 2017.

One person close to the situation suggested that the BoE had misunderstood what a V2 grading means, but that lobbying was well under way by sector representatives.

They said: “The sector is hopeful by the end of the week that the decision will be reversed.”

In addition to the ratings, the BoE is understood to have told some smaller to medium-sized HAs that they do not qualify because they are not large enough to issue benchmark bonds – despite some already having own-name bonds in the secondary market.

Simon Hatchman, executive director of resources at PA Housing, said that his 23,000-home, V1-rated organisation has already taken steps in response to the coronavirus crisis while maintaining its financial position, but that it has applied to the CCFF as part of plans to do all it can to “hit the ground running” as the sector emerges from the lockdown.

He said: “Our view would be that the housing association sector stands ready to quickly get back to work and begin investing in maintenance and new housebuilding work.

“A V2 rating remains a compliant rating. It is often a reflection of an organisation’s ambitious growth plans and the fact that it is working to sweat its assets, in line with government expectations to increase new build supply of homes.”

He added: “It would be beneficial for the housing sector and wider UK economy if the V1 restriction could be reconsidered. The result could be a faster return to volume new build housing delivery, and all the positive effects that investment has in supporting jobs and local businesses.”

House builders qualify for CCFF

The BoE said at launch that the facility is open to firms that can demonstrate they were in sound financial health prior to the COVID-19 shock, allowing it “to look through temporary impacts on firms’ balance sheets and cash flows from the shock itself”.

Eligible issuers 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. Where a short-term credit rating is not available, the BoE will consider whether a long-term credit rating can be used, or whether the bank itself “can assess that the issuer is of equivalent financial strength”.

The scheme also comes with a number of confidentiality undertakings for participants, including in some cases not allowing them to go public with whether they qualify at all, or to disclose the amount of paper eligible to be sold.

However, a number of publicly listed volume house builders including Taylor Wimpey, Barratt and Redrow have announced their eligibility for the scheme as part of their financial markets updates.

Redrow said it is eligible to sell up to £300m of commercial paper to the bank under the CCFF to bolster its liquidity during the housing market freeze and hiatus in construction.

The BoE has been contacted for comment.