Guarantee scheme softens interest cover covenant

In an interview in December, the portfolio manager for the AHGS told Social Housing that it was “cognisant” of the growing spotlight in the market on interest cover covenants as an “increasing topic of focus”. Richard Green, who is also a partner at ARA Venn, said of the scheme’s approach at the time: “[Any] interest cover covenant is something you’re going to be discussing with each of your borrowers. So far, it’s working out, but we’re aware that it’s an increasing topic of focus.”

The original interest cover was based on EBITDA MRI at 100 per cent, tested annually via a one-year look-back (ie based on expenditure within the previous financial year).

This look-back has now been extended to three years as an aggregate, Social Housing can confirm, so that any lumpy spend on major repairs in one year is spread out across the longer period.

Asked by Social Housing about the recent softening in its approach, Oriane Auzanneau, deputy portfolio manager for AHGS and director at ARA Venn, told Social Housing: “We’ve been engaging with the sector for quite a few months now. We’ve always been in listening mode, taking feedback, and I think it’s been increasingly apparent that housing associations and boards have got some challenges in respect in particular of the decarbonisation agenda.

“So, one concern and constraint that was flagged is that there is a fair uncertainty of time and cost involved with the decarbonisation agenda, and that some flexibility would be welcome on that covenant. So we were able to take that away and soften the covenant and offer something that is more flexible, in that instead of being a one-year look-back, it is a three-year look-back. And so it is not as stringent for any particular capex in any given year.”

Ms Auzanneau added: “The new covenant package has essentially a rolling three-year EBITDA MRI which we’ve maintained at 100 per cent.”

The change comes as data released by the Regulator of Social Housing at the end of May showed that registered providers’ capitalised repairs and maintenance expenditure was £2.3bn in the year to 31 March 2022, the highest on record, with spend forecast to reach £3.2bn over the next 12 months.

Enacting the covenant amendments, which Ms Auzanneau described as “meaningful changes”, has required engaging with the programme’s stakeholders, including government.

“For the scheme we have an ongoing conversation with government; we speak to them regularly. And so, yes, they are on board. And clearly, we continue to listen to what the market is telling us and to the conversations we’re having every week with borrowers and prospective borrowers.”

The AHGS 2020 can initially lend up to £3bn, with applications open until 26 April 2024, and there is an option for ARA Venn to extend by a further £3bn upon agreement by government. To date, £450m has been issued through the scheme’s dedicated funding vehicle, Saltaire Finance, of which £320m has been on-lent to four borrowers (and the remainder retained).

“The covenant being more flexible is indeed a factor that clearly helps the attractiveness of the scheme,” Ms Auzanneau said, describing the response to the softening among borrowers as “positive”.

She added: “Will there be borrowers for whom there would still need to be additional flexibility? Yes, probably.”