Loan stars

Need a loan? Credit-card companies are inundating us with offers of personal credit; high-street banks and building societies are competing fiercely for domestic remortgaging deals. But housing associations looking to extend their borrowing capacity or reschedule their loans might find they have fewer financial suitors than some of their tenants.

That's despite the fact that registered social landlords are enjoying a period of bargaining strength. To lenders who have seen demand from the corporate sector dry up in the face of economic uncertainty, RSLs represent a stable home for surplus cash. "Although there's a limited number of lenders, the ones that are in the market are bidding aggressively," says Phil Jenkins, vice-president at the Royal Bank of Canada.

Derek Joseph, managing director of consultant Hacas Chapman Hendy, points to multiple benefits. Banking covenants, or undertakings to maintain good financial health, have become less onerous. Instead of being locked into 25-year loans, some RSLs have the confidence to go for cheaper short-term loans plus derivative products to offset any interest rate rises. Pricing is competitive, with rates at around 30-35 basis points above the bank's lending rate, compared with 50 a few years ago.

But even as they settle at the negotiating table, RSLs will be aware that the range of lenders offering finance to the sector is shrinking. Bank and building society mergers have led to the disappearance of familiar names and there are concerns that the trickle of banks leaving the sector could become a steady flow. Abbey National has already indicated that it is reviewing its social housing business in favour of personal finance and the Council of Mortgage Lenders has warned that lending to housing associations is being jeopardised by the government's failure to involve lenders in policymaking (HT 9 January, pages 14-15).

Stock transfer deals are already facing a thinner supply of lenders. The CML estimates they amount to 15-20 out of a total pool of around 100; the Royal Bank of Canada's Jenkins warns that regeneration could become a pressure point if the complexity of deals evolves faster than banks' capacity to assess the risks. RSLs extending into market-rented, key-worker and student accommodation could find that the plain loans on offer from the banks no longer meet their needs.

The National Housing Federation and Housing Corporation are sufficiently concerned about shrinkage and inflexibility in lending capacity to commission research on the scale of the problem. Depending on the outcome, the organisations may launch a joint project aimed at raising the profile of the sector among financial institutions.

Already, the NHF is uncomfortably aware that the bulk of lending to the sector is in the hands of just a few heavyweights. Up to March 2001, a respectable-sounding 19 lenders had committed some £100m each to the sector. But more than 50% of all private finance in the sector originated from just five lenders: Nationwide, Halifax, Royal Bank of Scotland, Abbey National and Barclays.

"There are no immediate problems in the marketplace but the more players in the market, the better," explains NHF policy officer Bob Wilson. "It increases competition and helps to minimise the cost of borrowing."

Banks and building societies had an 80% market share, as at March 2001, but pension funds, insurance companies and specialist property investment vehicles are all under-represented in the sector. Continental banks are unlikely recruits without UK membership of the European single currency.

At Broomleigh Housing Association's parent group, Affinity, resources and finance director Mark Washer is both a beneficiary of the current borrowers' market and an advocate of greater financial choice. He says RSLs have traditionally allowed the market to dictate what financial products look like but could use today's "most favoured borrower" status to exercise some consumer power.

In January, Broomleigh refinanced £140m used to fund its ex-Bromley council stock transfer a decade ago, replacing a loan syndicate with bilateral agreements with four separate lenders. It also persuaded all four lenders to sign up to the same debt service covenant, reducing its administrative burden. In addition, increasing its borrowing capacity left room on the balance sheet for a £70m new loan to finance development.

But, like the NHF, Washer is looking to a future where RSLs may no longer be satisfied with the products on offer. "There isn't necessarily a bottomless pit, especially if some lenders are indicating they won't make new advances to the sector. The sector does have to positively market itself to ensure new people come in." In particular, Washer would like to see funders offer unsecured debt.

As part of its strategy to explore other financing avenues, Broomleigh became the first RSL to seek a credit rating – a shorthand measure of its financial stability. Although often associated with raising finance through bond issues, Washer feels its upgraded A-minus score from analyst Standard & Poors gave it an extra edge on the loan deal. "The impact was perhaps at the margins, but it can still be significant for a deal of this size."

So far, Shaftesbury Housing Association, is the only other association to go public on its credit rating – also an A-minus from S&P. Nigel Perryman, deputy group finance director at Shaftesbury, says "The rating speaks for itself. If we're talking to lenders, we can cut out much of the burden of examining accounts and systems. We're looking to expand into key-worker and student accommodation, so we'll need fairly substantial funding."

S&P director of public finance Nick Preston argues that a credit rating is the key not just to bonds but to alternative forms of finance and commercial deals. "A credit rating is the easiest way to define credit risks to institutions that don't have the banks' credit risk committees. More and more outside parties want more understanding of the market risk of trading with housing associations."

S&P has rated several other housing associations that have chosen not to go public, and is in talks with two more. If they decided to take this step into the private sector spotlight, they can expect to pay £20,000 for an initial rating, followed by £12,500 a year for the reviews some funders look for.

Both Shaftesbury and Broomleigh have explored the capital markets, issuing bonds against rental income. Shaftesbury arranged a £75m refinancing through the Royal Bank of Scotland a year ago, and Broomleigh's £40m bond dates from 1999. Their exposure is part of the £3.6bn the sector has raised through capital markets, as against £23.17bn from banks and building societies.

"There's traditionally low activity compared to the debt market, but we'd be happy to see members use the capital markets if it suits their purpose," comments Bob Wilson of the NHF. The advantages, as cited by the RBC's Jenkins, include longer maturities of up to 40 years, more attractive pricing and covenant packages. "I think the trend will be towards a mixture of bank and bond funding," he says.

Derek Joseph of Hacas Chapman Hendy agrees that bond finance should be seen as just one product in a mixed borrowing portfolio. "Bonds fix everything for a long term. You can't renegotiate [as with a bank] because the bondholders don't have an interest in your business. Then you pay financial penalties if your credit rating falls. Look at Cable & Wireless – there's no reason why it couldn't come to that in our sector."

At the moment, many RSLs feel protected from chill economic winds by beneficial refinancing packages. But today's glut of finance could be stretched thin in a future of increasingly complex deals. Although housing associations can still take top seats at the negotiating table, perhaps they need to shout a bit louder. Making their presence felt and their business better understood in the City could be the best protection they could buy for two or three years down the road.