Social housing finance: The questions everyone should ask
Published by Jon Land for 24dash.com in Housing
Social housing finance: The five questions everyone should ask
Louise Leaver, a partner in Winckworth Sherwood's social housing finance team, reveals the five questions that hold the key to making the right funding choices for housing associations.
There was a time when housing associations looking for finance need only ask “how much do I need?” and “which lender is currently offering the best rates?”
Life is no longer that simple. Despite pessimism about the new funding landscape there are opportunities out there, but it can be hard to untangle all the options.
We have found that the following five questions are essential when directing our clients towards the choices they need to explore to find the right funding.
1. Why do you need to raise finance?
The type of financing arrangement that will be attractive to you depends to a large extent on the underlying reasons for needing the money. If you have long-term debt due to expire, the capital markets may be the best fit. Where you have on-going development requirements, then joint venture arrangements or develop and leaseback type structures might be more appropriate; whereas stock acquisition can be better suited to a sale or lease and leaseback structure. Before you can get the money you need to be certain why you need it.
2. When do you need finance?
It is harder to strike a good deal when your back is against the wall. Many clients are exploring funding options now to deal with scenarios that may not be an immediate problem, or to address future funding requirements. These new structures can require a good deal of preliminary work to explore the legal and financial implications, and to consider whether there are any restrictions in existing finance documentation that would impact your plans (and if necessary to obtain consents). It is also worth bearing in mind that deals, particularly those with a capital market element can, move very quickly and require security immediately.
Planning well in advance, rather than waiting until things become urgent, puts you in a better position to sprint when you need to.
3. Who should you approach for finance? Is it worth negotiating with existing lenders?
Often they are open to discussions, which may involve some re-pricing of existing debt. It may also be just as advantageous to lenders to reduce the term of the debt and you just might be pleasantly surprised by their willingness to discuss options. Some of the traditional lenders are also taking advantage of the Government’s Funding for Lending scheme to provide advantageous rates on new monies. It is in their interest to retain your business.
There are also plenty of new lines of finance: the capital markets are increasingly opening up to smaller housing associations and to those based outside London and the South-East, although there are careful considerations about whether a public bond or private placement might be more appropriate. Many of the large pension funds are also receptive to direct investment – M&G through their social housing bond fund, L&G, Canada Life and Aviva are all interested in direct lending in the sector. There are also some newer lenders such as Metro Bank and Yorkshire Building Society. Shop around and find out who and what is out there. It is an important relationship and one size does not fit all.
4. Where should you look for finance?
Even now, most investment through the capital markets has been predominantly from large UK pension and insurance companies. There are a smaller number of US investors, particularly in the private placement market, but housing associations looking at this option should be aware of the currency risk that has to be calculated into the equation.
US investors will usually lend sterling and insist on a currency indemnity in the event that it all goes wrong. These investors may not understand the sector and consequently it can be time consuming to educate them. However, in the right circumstances they can offer better pricing for shorter-term maturities.
5. What is your cut-off point?
Be clear in advance about what would be your deal-breaker. When negotiating with existing lenders what would be the price you are prepared to play for flexibility? On the capital markets, you have to invest a lot of money and energy upfront – is there a point at which you would say it is not worth it, or that a private placement rather than a public bond is more appropriate? If you do not want to give away the family silver then sale and leaseback arrangements might not be for you. You need to be clear about what you are prepared to sacrifice, either in terms of loss of a historically low margin on existing debt in return for flexibility moving forwards or in terms of a change in approach to how you hold and manage your assets.
All of the above may seem obvious questions, but they are areas that need exploration and consideration before setting off on the latest funding adventure.
Louise Leaver is a partner in Winckworth Sherwood’s social housing finance team. Contact: lleaver@wslaw.
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