In this insight, we explore some of the factors causing this pressure on loan covenants and areas for Housing Associations to watch out for.
As the latest Regulator’s report highlights, debt accounts for the majority of financing in the sector, with providers having agreed facilities of £123.9bn as of the end of June 2023. The higher gearing and lower cash balances have increased the sector risk profile. With the lower V2 assessment becoming “the new normal”, the Regulator is reminding providers that they must have robust treasury management and governance processes in place to monitor the risk of loan covenant breaches.
To maintain a V1 grading, Housing Associations must demonstrate adequate assessment of risk and financial scenarios within their financial planning, with many setting and monitoring golden rules around loan covenant compliance, to provide a buffer and a red flag before they get close to a breach.
The current financial climate forces difficult decision making to achieve an appropriate balance between the level of investment in repairs and new development against the level of financial headroom. Some Housing Associations are accepting slightly greater financial risk during this period as they balance these priorities. Where organisations have either increased their financial risk tolerance in the short term or are experiencing the materialisation of financial risks, enhanced monitoring and control is essential, with Housing Associations looking to ensure that:
- They have an up-to-date assessment of the external environment and the impact on financial assumptions (e.g., inflation, market sale values, interest rates, timing of completion of schemes);
- Sensitivity analysis has been performed and any reduction in headroom identified;
- Stress testing highlights any specific risks or scenarios that, should they materialise, the Housing Association would no longer be financially resilient enough to absorb; and
- The level of Board oversight and assurance obtained over the above areas is proportional to the risk.
In this insight, we explore some of the factors causing this pressure on loan covenants and areas for Housing Associations to watch out for.
As the latest Regulator’s report highlights, debt accounts for the majority of financing in the sector, with providers having agreed facilities of £123.9bn as of the end of June 2023. The higher gearing and lower cash balances have increased the sector risk profile. With the lower V2 assessment becoming “the new normal”, the Regulator is reminding providers that they must have robust treasury management and governance processes in place to monitor the risk of loan covenant breaches.
To maintain a V1 grading, Housing Associations must demonstrate adequate assessment of risk and financial scenarios within their financial planning, with many setting and monitoring golden rules around loan covenant compliance, to provide a buffer and a red flag before they get close to a breach.
The current financial climate forces difficult decision making to achieve an appropriate balance between the level of investment in repairs and new development against the level of financial headroom. Some Housing Associations are accepting slightly greater financial risk during this period as they balance these priorities. Where organisations have either increased their financial risk tolerance in the short term or are experiencing the materialisation of financial risks, enhanced monitoring and control is essential, with Housing Associations looking to ensure that:
- They have an up-to-date assessment of the external environment and the impact on financial assumptions (e.g., inflation, market sale values, interest rates, timing of completion of schemes);
- Sensitivity analysis has been performed and any reduction in headroom identified;
- Stress testing highlights any specific risks or scenarios that, should they materialise, the Housing Association would no longer be financially resilient enough to absorb; and
- The level of Board oversight and assurance obtained over the above areas is proportional to the risk.
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