‘No interest in repricing deals’ if merger comes with no material change to credit quality, lender says

NatWest’s head of residential and housing finance also indicated that the position for lenders has changed somewhat from previous discussions involving the refinancing of older legacy loans.

“If we go back a number of years, where the market fundamentally changed; you know, margins used to be at 20 basis points for 30 years [for example], and then that fundamentally changed, and the capital treatment changed. I think there was a good degree of that repricing, because fundamentally, lenders’ loan books were probably so far underwater that if they didn’t do something like that, then they couldn’t invest in that anymore.

“So I think that there was that [consideration, but] my view is that that has changed now. So if there is a consent request for a merger that purely requires a consent request, then I have no interest in talking about repricing margins.”

However, he added: “I would hope that if I’ve got a series of loans that are hurting me financially, [then] that housing association will work with me to do some more incremental business that gets me to a more positive position, or eases my pain.”

Mr Eyre said it was also important that funders were treated equally in the merger loan discussions with housing associations. “We want to be reasonable that way, and I think all funders should be reasonable in that way.”

He added: “If [there were a situation where] some other funders were in the same position as us and they wanted to re-trade their margin, we kind of stick with no re-trade. And I think we just need to be treated equally, fairly, to all other funders.”

Asked whether NatWest was an outlier in its approach to repricing, Mr Eyre pointed to the fact that loans tend to be bilateral rather than syndicated, adding: “We just take our approach and we think that’s the right approach, and we’ll leave other funders to take the approach that they think is fair.”

On the same speaker panel, Caroline Moore, chief financial officer at Abri, was asked about the embedded value in pre-merger loans. Imran Mubeen, chair of the session and a director at Newbridge Advisors, asked when it is appropriate to give this up to gain merger consents.

“Obviously, an embedded value is either a beneficial margin on the loans that we’ve got compared to the market, or in terms of the length of the loans as well. But that is just one small aspect of the whole treasury portfolio,” Ms Moore said.

She noted that, first of all, the organisation would have “as open a discussion” with its funders as possible.

“We’ve got a great set of funders; they understand our business,” Ms Moore added. “It’s really important that we keep that understanding going so the relationship is there if we ever need to ask them for anything, but actually it’s understanding what that embedded value means to us and the value of it compared to what is the opportunity of the partnership in discussion.

“And it may be that we are willing to give up some [embedded value] for maybe a relaxed suite of covenants or some improved inter-group lending facility. So it’s the whole package, really, rather than just the [embedded value]; it’s also what extra capacity can be released from the partnership.”

Ms Moore also reiterated the importance of identifying the value that any partnership should be delivering to customers, when weighing up a merger.

Abri has been through several mergers, including in recent years the addition of Silva Homes and Octavia to the group.

“It’s about that long-term view: knowing what do we want, what do we need from any form of partnership? And that can be value that it brings to the organisation: financial value, but more importantly, what can it do for our own customers, but also the customers of the other organisations?”

Credit quality

Asked how mergers are assessed by funders at the credit committee stage – and what it would take for lender consent to be withheld – Mr Eyre said the key element in assessing a merger would be a risk appraisal of credit quality before and after the combination. Primarily, this would mean being satisfied that the credit quality of the merged entity is not materially different from the legacy one.

“Normally, what you would find is [that] boards would go into it with the intention of ensuring that their credit quality is improved or not changed, and they’ve got additional capacity.

“The times when that might not be the case will be if there’s a rescue, but, often, what you would find is that the size of the rescuer compared to the ‘rescuee’ is materially different, and therefore you can normally absorb [that impact]. That’s normally what happens, so you normally don’t see much of a difference [in credit quality].”

Mr Eyre added that, with regard to the motivations of merger partners, the preference from a lender perspective would be for a tie-up that “doesn’t involve a failing housing association”. But he said that, on a broader level, “anything that means there is more capacity to support housing across the UK… is something that we would support”.

“[It is] fundamental to the sector, and the availability of funding, which is plentiful, and the cost of funding that goes with that, that the sector remains a zero-loss sector,” he said. 

Clear communications

Speaking on the same panel, Helen Hunter, partner at Addleshaw Goddard, said that regardless of the motivations for the partnership, in her experience, the biggest driver of success in mergers is clear communication between the housing association partners and their funder group.

“Those are the mergers that go really well. And just being able to tell that story – whether it’s a rescue or whether it’s an ‘additionality’ merger – actually just bringing your funders along with you on that journey is super important, that clarity on ‘what does success look like for the end organisation?’”

NatWest’s Mr Eyre said he couldn’t recall a time his team had declined a merger consent, but that if this were to happen it would likely be caused by a “materially different” risk profile in the merged entity. “Even then, it might be a negotiation around the terms of the support, because ultimately boards don’t go into mergers without the right reason – so the fundamental is that the outcome is an outcome that both boards want, and the sector probably needs.”

Mr Eyre was also asked about the importance of the composition of the new board and executive.

“Management and leadership of organisations are essential. You know, when do we see things go wrong? It’s normally when leadership teams get it wrong and make bad decisions or don’t function properly.

“So actually, the composition of the leadership team for the merged entity is fundamental, and you need to know that at the time you are being asked to consent, so you can form some form of judgement.”