First Priority posts £5.8m loss and mulls ‘debt for equity’ swap

News09 Jan 2019Sarah Williams

First Priority Housing Association (FPHA) recorded a loss of £5.8m in the last financial year, according to full-year accounts posted last month.

The lease-based specialist supported housing provider is now considering a debt for equity swap with its main funder, which would raise questions over its not-for-profit status.

According to the accounts, the £5.8m loss resulted from a combination of “high bad debt provision, the majority of which relates to void income invoiced to care operators, as well as a shortfall of service charge income against service charge costs”. It said this included maintenance at a “relatively high cost” of £1.5m.

After falling into financial difficulty, First Priority reached a company voluntary arrangement (CVA) on 17 July 2018 with its main funder, Topland Henley Healthcare Investments (THHI), and agreed the transfer of properties for three landlords to other registered providers and a number of smaller landlords.

The accounts show that at 28 February 2018, total future minimum lease payments due stood at £265m, but by 1 November 2018, as a result of the CVA, these were reduced to £86.7m. The accounts state that the amount of “non-cancellable operating lease payments recognised as an expense” during the year was £11.5m.

The CVA, which was backed by 99 per cent of creditors (by value), was required because First Priority did not own any property that could offset its losses.

Mr Higgins said: “The CVA process effectively draws a line in the sand for FPHA’s activities and allows FPHA to start afresh from the date of the CVA on a sounder financial footing. Unlike other RPs who have been in trouble in the past, FPHA did not have an asset base with which to attract a larger RP to assist in financing FPHA.

“Those rescue packages have normally been recovered over time through a combination of asset management sales and/or reduction in running costs following a merger, something which was not possible with FPHA.”

In numbers

£8.2m

Expected gain on CVA creditors

466

Number of homes leased at 31 August 2018

9 months

Period of First Priority’s CVA

Source: First Priority HA 2018 accounts

The accounts say that the nine-month CVA, from July 2018, has ringfenced some historic liabilities and varied the remaining leases “to long-term sustainable levels”. Conditions also include a ‘standstill agreement’ with THHI precluding it from enforcing its security, variation of leases and a revised agency agreement to reflect its smaller scale.

While First Priority’s 2017 accounts questioned the business as a “going concern”, the latest accounts state a “reasonable expectation that FPHA has adequate resources to continue in operation for the foreseeable future”.

First Priority is also in discussions with remaining creditor THHI regarding a “potential debt for equity swap”, which would “strengthen FPHA’s balance sheet”. This would require the agreement of supervisors to the CVA, Begbies Traynor.

Social Housing understands that any such swap could impact the provider’s not-for-profit registered provider status.

However, Mr Higgins said: “The discussions are still at an early stage, so it would not be appropriate to make any further comment on it. We want to retain our not-for-profit status, and consequently we are taking our time with discussions to ensure we remain a not-for-profit provider.”

Jonathan Walters, deputy director of strategy and performance at the RSH, said that there was no precedent for third-party investors earning shares in a not-for-profit provider.

But he continued: “We are comfortable with both ‘for-profit’ and ‘not-for-profit’ organisations being on our register, but in all cases we would want to make sure that they are correctly designated and were meeting all of our standards.”