21/07/2021
Welcome to our July edition of Housing Finance Snapshot - a newsletter providing banking and finance updates and opinion for those based within the affordable housing and local government sectors.
LIBOR: transition documentation
We have now passed the Q1 deadline in the Working Group on Sterling Risk-Free Reference Rates 2021 Roadmap beyond which lenders should cease initiation of new LIBOR-linked loans and should have completed identification of all legacy LIBOR loans that need to be converted. On 5 July, Edwin Schooling Latter, Director of Markets and Wholesale Policy at the FCA made a speech on the LIBOR transition progress with six months to go.
As we move into this new phase for transition, we are starting to see different approaches to documenting the transitions, by way of override agreements being produced by lenders to document the transition to SONIA, as well as standard amendment agreements.
Our team can assist in reviewing override and amendment agreements. We are offering a fixed fee which decreases per loan agreement after the initial review. Please do get in touch if you would like to discuss any agreements or the transition process more generally.
The Affordable Homes Guarantee Scheme
ARA Venn, the investment firm appointed by government to deliver the new Affordable Homes Guarantee Scheme (AHGS), is open for business and is currently taking numerous new applications through credit approvals. Interest from Housing Association borrowers in England is building and is now understood to have tipped the £1 billion mark. The scheme is a major influx of investment into the sector, with a fund of £3 billion low cost, flexible long-term loans available to Housing Associations to deliver their business plans and to develop new affordable homes in England. The objective is that the fund will provide approximately 17,000 new affordable homes for social rent, affordable rent and shared ownership. The scheme will be complementary to the Affordable Homes Programme.
Funds will be raised by ARA Venn through a Medium-Term Note (MTN) bond programme, to allow speedy access to the capital markets at a range of maturities. It is estimated that the scheme will look to issue 30-year bonds at around 40 to 50 basis points over gilts – the government cost of borrowing. As the loans are underwritten by the government, lower than normal borrowing rates can be achieved. It is of note that the ARA Group has a strong commitment to Environmental, Social, Governance (ESG) objectives and supports long term responsible investment and delivering a positive social impact. Consequently, the expectation is that the scheme will have a strong emphasis on ESG investment and sustainability modelling. The most notable difference between the current scheme and its predecessor relates to valuations. Whilst earlier schemes allowed housing associations to borrow against assets which were valued via the existing use value for social housing (EUV-SH) method, the AHGS will enable registered providers to borrow against assets valued through market value subject to tenancy (MV-STT). The scheme is advertised as being open to housing associations of all sizes and will cater for transactions of all sizes and is therefore an exciting opportunity for the sector.
Update: Building safety and valuations for funding transactions
JLL and Savills have recently issues a joint guidance note on issues relating to building safety and the impact on valuations in the affordable housing sector, with the objective of generating consistency amongst lenders and valuers on the situations where an EWS1 form is required. RICS issued an updated EWS1 form in April and issued guidance establishing three categories of building (high, medium and low risk). The new approach was designed to free up 500,000 leaseholders from being asked to provide documentation for exempt buildings under the new guidance.
In terms of valuations for charging exercises, JLL and Savills have devised a set of standard questions for RP borrowers to assist with funder requirements in light of the new RICS guidance. The onus is on borrowers to provide robust and reliable information to enable the valuers to address the following fundamental questions JLL and Savills are required to report on to lenders:
- whether a building would transact as it stands, on the date of valuation
- if so, to what type of buyer (i.e., an RP or private investor)
- if so, whether a sensible allowance can be made for the cost of the works, and
- whether the building would therefore represent adequate loan security?
The note highlights that borrowers should factor in more time for the valuation process, as it may take more time than normal to provide the necessary information to valuers, for this to be reviewed and the due diligence completed.
Challenges have been identified with obtaining information on buildings below six storeys, because the focus has been on the taller and more complex buildings, whilst information on lower rise buildings is often less comprehensive. Where there is missing or unknown information, particularly in terms of robust cost estimates for remedial works, it still may mean that valuers are unable to determine either the necessary scope or cost of remedial works. Where costs cannot be quantified, it may not be possible in some cases to attribute a value without more comprehensive information being provided which means the property is not chargeable in the shorter term until more reliable and quantifiable information is provided. However, the valuers emphasize that each building is considered on its individual merits and that it is not necessarily the case that buildings with issues cannot be valued or, if they can, should only be valued on the basis of EUV-SH.
As the guidance is not statutory and lenders can decide whether to adopt this or not, how is this playing out in the market? Numerous lenders have indicated that they welcome the guidance but will continue to be led by valuers and will consider applications individually, with some lenders requesting EWS1 forms on some buildings that are exempt under the RICS guidance. Whilst the laudable aim of the new RICS guidance was to reduce the number of unnecessary requests for EWS1 forms, it appears that there is still some lender caution with no uniform approach being taken across the market. Lending decisions will continue to be formulated by each lender on a case by case basis according to their risk appetite.
FCA consults on climate-related disclosure rules
On 22 June, the Financial Conduct Authority (FCA) published two new proposals on climate related disclosure rules for certain regulated firms and listed companies. This follows on from the introduction of climate related disclosure rules for prominent listed commercial companies in December 2020.
The first consultation proposes the introduction of a climate-related financial disclosure regime in line with the Task Force on Climate-related Financial Disclosures (TFCD). This regime is designed for FCA-regulated pension providers, asset managers, and life insurers.
The second consultation proposes to extend the application of the new Listing Rule (which currently applies to premium-listed commercial companies) introduced in December 2020 to further apply to issuers of standard listed equity shares. This consultation also is intended to generate discussion and engagement on issues related to green, social or sustainable debt instruments and ESG data and rating providers.)
The deadline for feedback for both consultations is 10 September 2021.
HM Treasury independent group on standards for green investment
The Green Technical Advisory Group (GTAG) has been appointed by HM Treasury to oversee the government's delivery of a framework setting standards for investments to be judged environmentally sustainable – a 'Green Taxonomy'. The GTAG is to provide non-binding, independent advice to the Government on implementation and development of such a Green Taxonomy.
GTAG will be chaired by the Green Finance Institute and will be made up of financial and business stakeholders, experts in taxonomy and data, and experts from academia, NGOs, the Environment Agency and the Committee on Climate Change.
How can you stay compliant?
All registered providers are required to meet the Governance and Financial Viability Standard requirement to comply with ‘all relevant law’, and make certifications in their annual accounts in respect of this.
We have launched a new facility which can enable you to demonstrate compliance, including:
- Reviews of your internal processes
- Annual compliance reporting to your board
- A subscription-based legal update service covering key legal, regulatory and policy changes within the social housing sector
Find out more on how we can help you stay compliant.
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