THFC. The Housing Finance Corporation: Non deal-specific Investor Update September 2016

Transcription

1 The Housing Finance Corporation: Non deal-specific Investor Update September

2 Legal Disclaimer For the purposes of the following disclaimer, references to this presentation shall mean these presentation slides and shall be deemed to include references to any related speeches made by or to be made by the management of The Housing Finance Corporation Limited (), any questions and answers in relation thereto and any other related verbal or written communications. This presentation may only be communicated or caused to be communicated in the United Kingdom to persons who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Finance Promotion) Order 2005 (the Order ) or high net worth entities who fall within Article 49(2) (a) to (d) of the Order (all such persons being referred to as relevant persons ). Any investment or investment activity to which this presentation relates is available only to relevant persons and will be engaged only with relevant persons. This presentation is being directed at you solely in your capacity as a relevant person (as defined above) for your information and may not be reproduced, redistributed or passed on to any other person or published, in whole or in part, for any purpose, without the prior written consent of. The information in this document is subject to change without notice, its accuracy is not guaranteed, and it may be incomplete and is condensed. These presentation slides may contain certain statements, statistics and projections that are or may be forward-looking. The accuracy and completeness of all such statements, is not warranted or guaranteed. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that may occur in the future. Although believes that the expectations reflected in such statements are reasonable, no assurance can be given that such expectations will prove to be correct. There are a number of factors which could cause actual results and developments to differ materially from those expressed or implied by such forwardlooking statements. 2

3 Group is: A group of mutual finance vehicles whose sole purpose is lending on minimum prescribed, secured, terms to UK registered Housing Associations. No Vehicle undertakes maturity transformation, nor interest or currency risk. Each vehicle acts as a credit principal and is governed by a trust deed. All cash-flows are siloed. There is no interdependence between borrowers in one vehicle, nor between vehicles. Each vehicle is designed as a look-through to the underlying loans made. Group is not regulated, but circa 50% of the Group loans (AHF) are fully guaranteed by the Department for Communities and Local Government (DCLG) and both the HCA and NHF have been shareholders since inception in

4 Investor Relations Feedback from Investment Association to HAs on the quality of disclosure Made us think about how we represent the different vehicle portfolios within the stable: Active: AHF PLC Ltd Historic (Indexed )1 Ltd (Indexed) 2 Ltd (Social Housing Finance) Ltd 4

5 Five Year Financial Record 000 s Total Revenues Total Costs Surplus after tax Group Accum. Reserves Group Loans Outstanding Limited Reserves 3,285 4,195 8,316 8,344 8,422 2,047 2,341 3,662 3,201 4,301 1,007 1,410 3,572 4,062 3,289 11,583 12,993 16,565 20,627 23,916 2,882m 3,124m 3,368m 4,155m 5,087m 7,575 8,861 12,248 14,238 14,986 5

6 Group 2016 results and 2017 budget 2016 Actual 000 s 2017 Budget 000 s Total Revenues 8,422 10,021 Total Costs (4,301) (4,197) Surplus after tax 3,289 4,659 Accum. Reserves 23,916 28,575 New AHF lending volumes exceeded budget in 2016 by 163m despite inevitable delays causes by the July 2015 Government Budget revenues once again driven by AHF bond/eib arrangement fees and associated growth in annual fees costs impacted principally by further pension provision for future deficit contributions Loans Outstanding 5,087m 5,565m 6

7 Limited portfolio data 7

8 Ltd Rated Issuance Bond Rating (S&P) Outstanding k Index Constituent Funding No.1 A 235,205 iboxx Funding No.2 A 370,850 iboxx Funding No.3 A 625,300 iboxx Ltd Loan Portfolio as at 30 June ,000 60% ,500 50% 250 2,000 40% 200 1,500 30% ,000 20% % Outstanding Loan Balance m (RH Scale) Number of borrowers Number of Loans - 0% Top 5 exposures as a % of loan book Top 10 exposures as a % of loan book Top 20 exposures as a % of loan book 8

9 000's Exposure balances by HA Group 30 Jun ,000 Top 10 exposures 140,000 Borrower (Group) Rating Current Balance 1 Southern G15 A1 145, , ,000 80,000 60,000 2 A2Dominion G15 A+ 135,221 3 Network G15-130,617 4 Family Mosaic G15 A1 92,927 5 Home A 65,467 6 Paradigm 65,000 7 Hyde G15 AA- 62,648 8 Genesis G15 Baa1 56,500 9 Thames Valley 54, Westcountry 47,000 40,000 20,000 0 Individual HA Group Loan Balances 9

10 Geographical Portfolio Spread by Current Balance London Total 35% East of England Total 2% East Midlands Total 4% Yorkshire and the Humber Total 5% West Midlands Total 6% National Total 6% North East Total 1% North West Total 6% Northern Ireland Total 6% Wales Total 8% Scotland Total 5% South East Total 9% South West Total 7% 10

11 Total Loan Balances '000's) 1,800,000 1,600,000 1,400,000 1,200,000 Strong Over-Collateralisation - Fixed Charge Asset Cover 30 Jun 16 has an additional security covenant: Net annual Income from Security must always cover Interest payable on the loan 1,000, , , , ,000 0 Percentage Cover MV-ST 11

12 Asset Cover History Quarter End Group Only % % 31/03/ /03/ /03/ /03/ /03/ /03/ /03/ /03/ /03/ Significant new business written between 2009 and 2013 with asset cover between 150% and 200% Withdrawal threshold at 200% delivers improved over-collateralisation over the long term Significantly more conservative compared to own-name bond issues where 115% MVT cover is the norm 12

13 Liquidity Resources in Stress Scenario (underlying borrower default) Loans funded by bonds issued by (Funding No 1) plc, (Funding No 2) plc and (Funding No 3) plc have bespoke liquidity resources and a two year grace period between legal final and expected final maturity dates. (Funding No 1) plc (the Issuer) has the benefit of access to a liquidity facility provided by RBS Sized at 2 years of interest ( 24.1million supporting 235.2million of debt) Following downgrade of RBS (short term rating) the facility has been drawn in full and held in cash Can be utilised to cover any cash flow shortfall at the Issuer level (i.e. not just in the event of non-payment by an underlying borrower) (Funding No 2) plc and (Funding No 3) plc Underlying loans to individual borrowers have a requirement for an interest service reserve equal to one year of interest Can be used by to service its loan to Funding No 2 or Funding No 3 in the event of nonpayment of interest by an underlying borrower under the terms of specific loan agreement Total interest service reserves of 56million supporting million of debt Loans funded by Debenture Stocks and bank loans have no bespoke liquidity resources. Liquidity to cover cash-flow shortfalls while enforcing security in relation to the defaulted loan would be limited to s cash reserves and any bespoke facilities negotiated. 13

14 6,000 Ltd Annual Cashflow with No Liquidity Risk Mitigation - Top 20 as at 30 June ,000 4,000 3,000 2,000 1,000 0 Unmitigated Cash Flow 14

15 Nominal ( 000's) Bullet repayment debt maturity profile debenture stocks 200, , , , , ,000 80,000 60,000 40,000 20,

16 Nominal ( 000's) 11.5% Debenture Stock maturity 2016 Next key maturity is October/November 2016 when 156.5m of debenture stock matures Spread across 38 borrower groups Immediately available liquidity ( Ltd. cash reserves plus undrawn RCF) 23.5m 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,

17 11.5% Debenture Stock exposures over 5mill Borrower/ group Nominal amount (000s) Credit Grade Fixed charge Asset cover (at June 2016) External Rating/s Places for People 19,500 3A 288% A+/A3 L&Q 16,000 2A 659% AA-/A1 Radian 10,500 2B 281% -/A1 Family Mosaic 10,100 1B 644% -/A1 ASRA Housing Group 7,250 3A 286% -/- Black Country* 7,000 2A 229% -/- Genesis 6,000 3A 377% -/Baa1 * Floating charge security with fixed charges also. Estimated MVT asset cover. All 11.50% debenture stock borrowers reviewed and none gives any grounds for concern. 17

18 Nominal ( 000's) Debenture Stock maturity 2023 After 2016 the next key maturity is October/November 2023 when 189m of debenture stock matures Spread across 46 borrower groups 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,

19 AHF summary 19

20 m /AHF Business Volumes 1, AHF budgeted includes pipeline applications / / / / / / / /17 EIB Bond AHF EIB AHF Bond AHF Budgeted EIB AHF Bugeted Bond 20

21 AHF the most successful Government Guarantee programme Loans signed and drawn 1.913Bn Loans signed but undrawn 0.298Bn 54 Borrower Groups to date (average loan size larger than ) Progressing through credit and/or documentation 0.391Bn Estimated Portfolio Total 2.602Bn - funded by EIB facilities and long term bond issues 21

22 millions 4.00% Success of the Affordable Homes Guarantee Scheme AHF - priced fixed rate debt - cumulative amount and rates 2, % 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% AHF EIB FIXED - Amount priced (RHS) AHF BONDS - Amount priced (RHS) AHF BOND - all-in rate AHF EIB FIXED - all-in rate AHF FIXED - All-in Rate AHF FIXED - saving achieved 1,800 1,600 1,400 1,200 1, % 0 22

23 2016/17 Business themes AHF bond and EIB issuance likely to continue to calendar year end AHF second bond series likely to approach 1Bbn. Application made for repo eligibility with Bank of England Further EIB activity much less likely in wake of BREXIT Considering some issuance Tempered risk appetite while Government policy intentions become clearer Opportunity to consolidate rapid growth in portfolio 23

24 Sector Outlook 24

25 Could rebalancing of policy post BREXIT represent an opportunity for HAs? 25

26 Components of GDP 26

27 From Home Ownership trumps all to domestic growth by any means ONS reclassification Dec 2015 Spending Review focusses 4.1Bn grant programme for shared ownership (back-loaded to 2020) Introduces LHA cap for HB payments in social housing by 2018 March 2016 Welfare Reform and Work Act introduces 4x1% Annual rent cuts for HAs Deregulation package designed to reverse ONS decision in England Voluntary RTB (not much impact to date) HIST and LA high value asset sales (also not much impact) Introduces (but doesn t switch on) Housing Administration 2016 Autumn Financial Statement: Measures for domestic growth: Wider tenure mix Acceleration of grant? Guarantees Mk 2? 27

28 Home Starts Thousands English Housing Starts Annual Housing Starts Government annualised target Private Enterprise Housing Associations Local Authorities All Dwellings HA starts don t Reflect all S106 On the subject of housing, the British are experts. Most people either own one or want to. And demand usually grows by 200,000 units per year; each year only about 150,000 are built. Steadily rising house prices are the result of this mismatch. FT Lex 23 August

29 What does Deregulation Mean? 30 October 2015: ONS reclassifies English RPs as Public Non-Financial Corporations, listing: Control over disposals of housing assets Direction over use of disposal proceeds Powers over disposal of housing stock following de-registration Powers over voluntary winding up of RPs Power to appoint managers and officers to an RP NB not rent setting! Extended term of Chair to March 2018 Outcome of HCA Review imminent: Leading to a fully independent regulator? 29

30 Markets & Competition Short term uncertainties around rent-cuts/policy drove a s/t shift to private transactions Shorter term bank financing embeds more refinance risk (selective opportunities for?) Post BREXIT, HAs viewed by institutional investors as a defensive investment In the short term, many developing HAs have been strongly cash-generative Continued QE means HAs viewed as a value added investment (witness demand for PfP unsecured) AHF has been the competition! 30

31 Housing Association source of new funding by financial year: Flows Stock Sector Snapshot at June 2016: 80.8Bn facilities 66.3Bn drawn 20.7Bn drawn capital markets debt Source: HCA Quarterly Survey of Providers 6/16 And data Source: HCA 8/16 Bn 31

32 Markets & Competition Minimum Spread differential now:0.67% from average 0.71% 32

33 HA Public Bond Issues Since May 2014 Nominal Rating Date Term Spread Cost Moodys Amount ( ) Issued (Years) over Gilts of funds BCA AHF 208,000,000 AA/- May % 3.76% Town and Country 80,000,000 A+/- Jul % 4.67% Boston Mayflower 150,000,000 A+/- Sep % 4.30% A2Dominion 150,000,000 -/-/AA- Sep % Cross Keys 150,000,000 A+/- Sep % 4.30% Walsall 250,000,000 -/A2 Oct % 4.28% baa1 Guinness 100,000,000 -/A1 Oct % 4.00% a3 Yorkshire 200,000,000 -/A2 Oct % 4.23% baa1 AHF 198,500,000 AA/- Oct % 3.30% Wheatley 300,000,000 A+/- Nov % 4.40% Herefordshire 120,000,000 -A2 Nov % 4.19% baa1 Riverside 250,000,000 -/Aa3 Nov % 4.00% A2 Paragon 250,000,000 -/A2 Jan % 3.63% A2 Richmond Housing Partnership 175,000,000 AA-/- Jan avg life 1.17% 3.30% Swan 250,000,000 A+/- Feb % 3.63% AHF 194,000,000 AA/- Mar % 2.92% Orbit 250,000,000 -/A1 Mar % 3.61% a3 GB Social Housing 16,800,000 A-/- Mar % 3.88% AHF 208,000,000 AA/- Aug % 2.89% Metropolitan 250,000,000 A+/- Sep % 4.20% London & Quadrant 250,000,000 AA-/A1 Oct % 3.84% a3 AHF 194,000,000 AA/- Mar % 2.71% London & Quadrant 300,000,000 AA-/A1 Mar % 2.63% a3 AHF 130,500,000 AA/- May % 2.62% AHF 191,400,000 AA/- Aug % 1.99% PfP Homes UNSECURED 400,000,000 A+/A3 Aug % 2.90% baa2 33

34 Sector Risk Key Areas of Impact Rent cuts imposed in 7/15 budget have highlighted political risk, impacted operating margins, but driven the search for efficiencies. Income risks from Universal Credit have been deferred due to delayed roll-out, although creeping effect of benefit cuts. Development risk 1 move from S106 to in-house development tests development competence. Potential complication from the starter homes initiative. Development risk 2 build for affordable home ownership and potential repetition of the problems seen in 2007/8/9. Development risk 3 build for sale exposes sector to new risks, and cash-flow volatility. Merger risks 34

35 Sector Risk - recent experience In the last 12 months, /AHF has undertaken detailed due diligence on more than 25 (English) associations. These analyses have evidenced: A willingness and ability to cut costs, from anything between 5% and 10% of operating expenses (exc. depreciation). Most associations have either reduced or maintained pre-budget forecast development volumes. A small number of associations have forecasted increased development. In all cases, the additional developed units more than offset the budget rent cut impact on income but at the expense of leverage. A significant shift in tenure-mix, mostly towards shared-ownership, but also outright sale to a lesser degree. Bank lender covenants generally present no constraint. 35

36 Sector Risk - Stress Tests As part of our credit due diligence, we sight borrower s stress testing models, and sometimes request specific additional scenarios. Typical stresses include: An assumed extension of the 4 year rent cuts, or CPI flat in perpetuity. Interest rate increases well above OBR forecasts. A welfare reform stress that sees bad debts/voids etc. double. A house price fall of 20%-30% across the entire sales programme. A sales delay, of typically 12 months above plan. The usual outcome of stress testing is: Little covenant stress in the first 5 years (often longer). Funding usually adequate for at least 2-3 years. Significant ability to curtail development expenditure. Fall-back position of fixed asset sales, and/or converting sales units to rental tenure. KEY FEATURE TIME TO ACT/MITIGATE. 36

37 Conclusion continues to deliver good earnings growth By end of financial 2016/17 (Sovereign guaranteed) AHF portfolio will represent c 47% of Group loan portfolio, driving significant sustainable growth in Group operating income. Post BREXIT the policy environment for HAs possibly more favourable. May present opportunities for further guaranteed business. But heightened development risks for HAs. Continuing desire to shorten maturities by banks itself presents an opportunity for selective growth. Institutional investment appetite positive in the wake of more QE. 37

38 Questions 38

39 Appendix 39

40 The Housing Finance Corporation Limited Structure Overview Issued Bonds Issued Bonds Issued Bonds Issued Bonds Loans Public stocks 11.50% stock due % stock due % stock due 2027 Plus PPs 67.6m AA- (issued Dec 2004) 32m AA- (tap Dec 2006) 37m AA- (tap March 2007) 33m AA- (tap Dec 2007) 80m AA- (tap Aug 2008) 191m A+ (issued July 2009) 72.25m A+ (tap March 2010) 76.6m A+ (tap Jan 2011) 31m A+ (tap March 2011) 100m A+ (issued Oct 2011) 131m A+ (issued Jan 2012) 130.5m A+ (issued Apr 2012) Trustee/s in relation to Debentures and Private Placements Funding No.1 PLC ( 1 ) (Issuer Rating AA-) Funding No.2 PLC ( 2 ) (Issuer Rating A+) Funding No.3 PLC ( 3 ) (Issuer Rating A+) EIB and other Banks Security floating charge over s assets (secured loans) All secured creditors are pari passu Relationship between secured creditors regulated by Deed of Priority The Housing Finance Corporation Limited ( ) Security first fixed charges over specific residential properties (or, initially, over cash) Housing Association Housing Association Housing Association Housing Association Housing Association Housing Association Housing Association Housing Association Housing Association Housing Association Housing Association Housing Association 40

41 Group Structure The Housing Finance Corporation Limited T.H.F.C. (Indexed) Limited T.H.F.C. (Indexed 2) Limited T.H.F.C. (First Variable) Limited T.H.F.C. (Social Housing Finance) Limited T.H.F.C. (Services) Limited Principal debt issuing entities UK Rents (Holdings) Limited T.H.F.C. (Capital) Plc Affordable Housing Finance PLC UK Rents Trustee Limited UK Rents (No.1) Plc

42 Management Chief Executive Piers Williamson Executive Assistant Group Treasurer Fenella Edge Finance Director and Company Secretary Colin Burke Credit and Risk Director David Stokes Relationship Management Security Portfolio Management Treasury and Portfolio Management Accounting and Finance Managed Companies Monitoring and Reporting Company Secretarial Borrower risk assessment Risk appetite Risk framework Credit grading models 42

43 Non Executive Board Members Ian Peacock * Will Perry Gill Payne * Keith Exford CBE John Parker * Deborah Shackleton CBE * Charlie Arbuthnot ** Non Executive Chairman Investment and merchant banker. Retiring Chair of Family Mosaic Housing Group Assistant Director of Regulatory Strategy & Performance HCA Director of Policy and External Affairs National Housing Federation Chief Executive Affinity Sutton Housing Group, Chair G15 (Large London Housing Associations Group) Chartered Accountant, Vice Chairman Newbury Building Society, former building society Chief Executive and Chairman Building Societies Association Former Chief Executive Riverside Housing Group, Governor Liverpool John Moores University, Board Member NHS Sefton Ex-investment banker: Warburgs, Hambros & RBC Capital Markets. Now housing consultant Appointed 2013 Appointed 2014 Appointed 2014 Appointed 2011 Appointed 2010 Appointed 2011 Appointed 2008 * Member of Credit Committee ** Chair of Credit Committee 43

44 : Standard & Poor s Rating Major Rating Factors Strengths Relatively strong franchise value Strong support from the UK Government, which underpins borrower creditworthiness Robust collateralisation of loan book Match-funded approach minimizes asset-liability risk Weaknesses Modest liquid financial resources and low capital levels Exposure to single sector, with borrower-concentration risk Potential for conflicts of interest could arise from board composition and responsibilities Vulnerable to operational risk stemming from small staff numbers and key personnel risk s S&P Rating was lowered one notch to A Stable following the UK Sovereign downgrade in July Prior to this, s rating had remained unchanged at A+/Stable/A-1 since first obtained in 2004 Now classified as a Finance Company along with other companies whose primary focus is lending to the public sector or lending to government-supported borrowers Rating potentially includes one notch Government Related Entity uplift from SACP 44