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Housing association downgraded by regulator over development programme concerns

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Housing association downgraded by regulator over development programme concerns

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Published by Jon Land for 24dash.com in Housing

Housing association downgraded by regulator over development programme concerns Housing association downgraded by regulator over development programme concerns

A housing association has been downgraded by the social housing regulator due to concerns about the financing of its development plans.

In a regulatory judgement, the Homes and Communities Agency downgraded the viability rating of Hightown Praetorian and Churches Housing Association (Hightown) for "three key exposures" even though the 4,300-home housing association reported a net surplus of £6.7 million for the year ending March 31.

The HCA judgement stated: "The first exposure is that Hightown’s existing properties do not yet provide sufficient security to allow it to finance full delivery of its planned development programme beyond August 2015.

"Properties currently being developed will need to be charged as security to achieve this. Ensuring sufficient security is available on a timely basis becomes increasingly difficult when most properties are already charged as security.

"The association has demonstrated that it is currently actively managing this material risk. However, as its committed schemes require expenditure until March 2016, the current strategy of charging new/future stock does not yet provide assurance that this risk is fully mitigated.

"The second exposure is that Hightown needs to put in place additional loan facilities to fully deliver its committed AHGP allocation, which extends to March 2016.

"Existing loan facilities may only meet the association’s requirements up to the end of August 2015, though Hightown has some flexibility over the timing of non-grant funded works that may extend this beyond August for a limited period of months. There will also need to be re-financing of facilities totalling £22m in 2016 and £28m in 2018. The association is making progress towards arranging additional loan facilities.

"The third exposure is that interest rate assumptions in the business plan over the medium-term are significantly less prudent than those of many other providers and the association has a relatively high proportion of debt on variable rates. Should interest rates rise rapidly Hightown would intend to manage its exposure by switching quickly from floating to fixed rates.

"However the stress testing undertaken by the provider on this interest rate risk has a starting point that is much lower and therefore may not be robust. Hightown should reconsider the prudence of its base plan interest rate assumptions, undertake further stress testing of interest rates, and consider revisiting its overall treasury strategy to ensure that there will be sufficient headroom against covenants in future.

The HCA, however, did point out that: "Based on evidence gained from previous contact with the board and executive and a review of board papers, the regulator has assurance that governance arrangements remain sufficient to adequately control the organisation to enable it to continue meeting its objectives."

Responding to the downgrade, Hightown chief executive, David Bogle said: "We are disappointed to have been downgraded for viability especially when our financial position has improved considerably since our last rating.

"We believe that the risks associated with developing and funding 400 new affordable homes a year are well managed but it may be inevitable that the relative size of this programme points to a V2 rating."


Regulatory Ratings

Properly Governed: G1
The provider meets the requirements on governance set out in the Governance and Financial Viability Standard.
Viable: V2
The provider meets the requirements on viability set out in the Governance and Financial Viability Standard but needs to manage material financial exposures to support continued compliance.

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