Supporting Older People Conference B1: Accessing funding for mid-sized and smaller housing associations Speakers: Fenella Edge Treasurer, The Housing Finance Corporation Michael Leslie Director, JC Rathbone Associates Chair: Julian Foster Director of Resources, Cross Key Homes
National Housing Federation Funding for Mid-Sized and Smaller Housing Associations Workshop JC Rathbone Associates & The Housing Finance Corporation Authorised and regulated by the Financial Conduct Authority
Contents The challenges of accessing funding for midsized and smaller housing associations 1. Capital funding environment 2. Existing bank debt 3. Current borrowing market 4. Refinancing risks
1. The capital funding environment Nearing the end of a transition period Grant (no carry cost or repayment) Bank debt (long dated, low margin, low carry cost) Moving to a more diverse capital structure Diversified business models and income streams For most smaller/mid-sized HA s funding begins with current lender and facilities especially if sole lender (covenants, consents, undertakings) Current interest rate hedging long term fixed rates Sector remains attractive to banks and capital market investors (strong credit fundamentals and demand)
2. Existing bank debt Re-pricing of historic loans remains a risk, trend to wait for you to approach the lender Why: End of availability or fully drawn Restart / new development funding, Margin resets, Covenant ratchets Facility not fit for purpose? Increasingly, merger & consolidation activity Lenders claim they will not take advantage of consents, but objectives to reduce capital & improve return Trade off - Term vs Purpose vs Price OR How much? What for? When?
3. Current senior debt market The mix of debt participants has changed Traditional lenders, challenger banks and investors Term loans, private placements and sale & leaseback Greater awareness of risk and purpose Key lending terms Term: 5-10 years remains sweet spot (investors will do 30yrs) Pricing: purpose and term (wide range 150-275bps) Availability: limited unless revolver (delay / phased drawdown) Utilisation and other fees Documentation and link to legacy facilities and hedging required Robust business plan, integrated development programme and experienced management critical
4. Refinancing risks Key considerations Current facility restrictions: rarely a clean slate Security: excess (release), unencumbered, development Re-pricing, yes but strategy should drive funding Higher carry costs: commitment fees and investment strategy of drawn funds Legacy fixed rate break costs need to be managed Inflation linked coupons of some structures Rents at CPI+1% but only until 2025 Relationship of costs to RPI/CPI in your BP Management of increasing refinancing risk cycle Time to ask for anything else? Two way negotiation
Rates remain at / near historic lows but Vulnerability to floating rate increases Current hedging break costs material to restructure of most housing associations Historical norm 4.5% (5.5% pre 12/08)
Rates forecast to rise on recovery, but have stayed lower for longer Compare to (a) your business plan new normal and (b) capital market costs
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THFC
THFC Non-bank Funding Options Bond Debt Products Public bonds Private Placements Retail Bonds Loan from aggregator THFC, AHF, GB Social Housing, Carduus Funding sourced from the bond markets or, in the case of THFC and AHF, from the European Investment Bank Sale and Leaseback arrangements
THFC Accessing the market How much do I need or want to borrow? What is my key driver? Cost of funds Maturity and repayment profile Flexibility on drawdown Covenants/security Timing/certainty of delivery Do I want to get a rating? What sort of relationship do I want with investors?
THFC Size matters For loan amounts of 20million or more, a private placements is an option There are different types of private placement, with listed public style placements becoming more common For loan amounts less than 20million, accessing funding through an aggregator is a more likely route
Cost of funds THFC Private placements The cost of funds is negotiated between borrower and investor/s careful thought and a strategy needed to create price tension Based on comparators if appropriate but premium pricing usually expected A rating will deliver lower cost of funds Loan aggregator funded from bond markets The cost of funds will be based on rating of the aggregator, pricing of existing bonds, size of the issue and reputation/investor familiarity A rating for HA participants is generally not required
THFC Drawdown, maturity and repayment Private placement Flexibility can be negotiated Deferred drawdown only a small number of investors Bullet or amortising repayment across maturity range Loan aggregator Limited flexibility on drawdown but retained bonds and access to regular tap transactions increase flexibility Repayment profile driven by demand from majority of borrowers and set for future taps
THFC Covenants and security Private Placement Negotiated between investor and borrower but similar to covenant-light public bond issues Loan aggregator Limited flexibility for negotiation of covenants Ranging from asset specific covenants only to a menu including corporate financial covenants
THFC Timing/certainty of delivery Private placement Will depend on negotiations with investor/s May require concessions as negotiations near completion Loan aggregator Requires critical mass to access the market and timing will be driven by the build up of that critical mass Documentation should be standard though so timescales more certain once critical mass achieved and time to market can be very short
THFC What matters to UK investors Increasing supply of HA bonds and PPs Differentiation between credits Changing regulatory landscape Commercial activities Impact on cashflow of Lower grant rates and the affordable rent programme Benefit reform Direct payment of benefit Benefit reduction Caps RSRS (Bedroom tax)
THFC Aggregation - considerations Existing aggregators have set rules already and limited flexibility on covenants but can offer Standard documentation Investor familiarity Repeat borrowing through taps and size flexibility via retained bonds Speed to market Set up costs and ongoing costs can be shared In a new aggregating vehicle the structure and rating methodology would need to be agreed
THFC EIB funding EIB funding available as direct loans only to the very biggest borrowers Otherwise, available through THFC and AHF in amounts down to 5million Some flexibilities of bank funding and very low cost Available only at certain times and with specific eligibility criteria THFC and AHF security covenants as applicable
Recap - Accessing the market How much do I need or want to borrow? What is my key driver? Cost of funds Maturity and repayment profile Flexibility on drawdown Covenants/security Timing/certainty of delivery Do I want to get a rating? What sort of relationship do I want with investors? THFC
THFC Shameless plug For more information about accessing funding through the Affordable Housing Guarantee Scheme please come to an additional session: TODAY at 1pm Panorama 3 Rootes building Refreshments will be served
Discussion and Q&A
Supporting Older People Conference B1: Accessing funding for mid-sized and smaller housing associations Speakers: Fenella Edge Treasurer, The Housing Finance Corporation Michael Leslie Director, JC Rathbone Associates Chair: Julian Foster Director of Resources, Cross Key Homes