Your flexible friend

For Registered social landlords, it is important that loans are as flexible as possible. Even though they are long-term borrowing commitments, they tend to be varied or refinanced once every five or so years.

Lenders, too, are increasingly aware that loans must be more flexible so that they can be moved around their groups or repackaged and can cope with the financial institutions' mergers and reorganisations.

But, unlike large corporations, RSLs do not tend to borrow unsecured; they use property as security in the hope of minimising margins and reducing weighting costs, but they are also subject to commercial requirements given the life of the loan. The great difficulty of moving property security around is the biggest obstacle to increased flexibility.

It costs money to move the underlying security to a new lender and to get the best deal. RSLs have to balance this cost against the slightly higher margin they will be asked to pay if they move to a new lender but leave the security with the existing one.

The solution is security trust arrangements. These are deals in which the property security is held by a security trustee, who could also, in some cases, be the lender.

There are two types of security trust arrangement. In one, the lender acts as security trustee and the relationship is embedded in the loan agreement. This security arrangement could be transferred to a third party, but it is really meant to allow for changes within the original lender.

The difficulty of moving property security around is the biggest obstacle to increased flexibility in loan agreements

The second type of agreement is a free-standing security trust deed. Whereas this may be linked to a particular loan deal, it would be capable of comprising several loans and may also involve a third party as security trustee. Involving an independent security trustee costs money, of course, but brings a number of advantages, mainly in relation to the borrower being able to drive the service standards relating to the security taking work.

Pooling resources
In both types of agreement, the security trustee assigns the benefit of the security to the underlying lender. In the free-standing arrangement, more than one lender will usually be involved, so the security trustee will make an allocation to each so as to meet the loan-to-value covenant in each of the loan agreements. This will leave, potentially, an "unallocated" pool ready for use as security in the future.

The advantages of this for the RSL include:

• the ability to charge up properties to the security trustee on acquisition (or immediately post-development)
  
• the ability to keep all of your title deeds together
  
• the rapid use of 'free' property as security for new loans
  
• the ability to terminate a security arrangement for one loan without having to discharge the underlying security and lose the benefit of being able to continue to rely on the underlying due diligence. This means that these assets will then become part of the "unallocated" pool waiting for allocation as security for a new loan. Asset classes can be bunched for allocation as security for loans which provide the best return; for example, the amount of loan which can be made available against particular types of assets (say, key worker or minor defective titles). This could result in otherwise unchargeable security becoming capable of utilisation
  
• being able to tie up revaluations of all security at the same time (and possibly with a balance sheet revaluation)
  
• being able to organise small releases without incurring unnecessary costs.

There is a good chance that lenders would still want to refresh some of the due diligence carried out on those properties when they accept them as security for their loan. But the scope of this due diligence would become a matter for commercial negotiation at the outset – with recognition that, for example, when loans are sold and bought by banks, the buyer seldom carries out new due diligence on the underlying security.