Rethinking treasury management: is your association ready for change?
Strategic treasury management in social housing has evolved rapidly over recent years into something far more complex. Leading treasury teams are now building more robust and flexible frameworks that allow their organisation to seize opportunities and deliver ambitious organic growth. A holistic and innovative approach to financing and risk management is imperative for a treasury team to achieve its strategic objectives.
So, with that in mind, what are the key themes we’re seeing as people re-think housing association treasury? How are the attitudes of the sector’s traditional financial institutions changing? And what can we learn from treasurers in other sectors?
Social housing organisations are large users of the sterling banking and institutional investor market.
Funding platforms tend to be composed of short-to-medium-term bank liquidity facilities; medium-to-long-term legacy commercial bank term loans; medium-to-long-term European Investment bank facilities; or long-term sterling debt capital market issuance through standalone or aggregator issuance.
Most of the sector’s financing is on a secured basis.
Given that banking products are mainly on a floating rate basis, organisations have also been managing the interest rate exposures using hedging products.
Market risk management arrangements are documented through secured ISDA agreements (e.g Property or Cash Collateral) or embedding the hedging in the loan arrangements. Foreign currency debt issuance and associated hedging is utilised on a limited and infrequent basis.
However, larger housing associations are already creating flexibility across treasury departments to position their teams for the next phase of growth with EMTN programmes, significant restructuring of legacy facilities as the value of legacy portfolios amortise and associated hedging transactions, the move to unsecured financing and hedging as well as accessing foreign debt capital markets. In some instances, these changes have gone hand in hand with a major corporate restructure or merger but common to all is the need to understand the value at risk, but also the potential benefits that could be obtained from changing tack to debt.
Turning the tide
As we can see from the chart above there is currently a significant utilisation of commercial bank providers (mainly UK clearing banks) and large main UK debt investors (large pension funds). It is also worth clarifying the participation of European Investment Bank financing; and debt provided by a large UK building society as well as a French nationalised bank.
The sector should be analysing these exposures in detail and assessing the incremental risk appetite of each of these sources to assess potential capacity constraints. Our experience dealing with numerous financings, refinancings and mergers tells us that identifying efficient replacement capital should be a high priority for housing association treasury teams.
The attitudes of certain debt providers who have traditionally provided efficient capital in the sector have changed, or are changing. They will either not be able to provide new capital, or the capital they can provide will require higher returns. The concentration of certain banks in social housing is already high, and even larger when we consider implicit leverage of hedging arrangements.
Meanwhile, further clarification is needed on the future of European Investment Bank financing in light of the UK’s planned departure from the EU. All of the above means that the design of broader and more robust funding and risk management platforms is important if treasurers want to mitigate potential capital constraints. To create a better use of capital, we should be considering liability management, as well as new bank and debt investor relationship initiatives.
Negotiating with existing counterparties and exploring the restructuring or rebalancing of portfolios can better optimise use of capital. Engaging with new counterparties as part of a wider funding plan will also lead to capital efficiencies.
Working across the regulated infrastructure and property sectors, we have seen some high-level treasury themes that we think might be relevant to social housing.
The majority of utilities are rated entities A- or BBB+ and use a wide variety of capital providers:
- Large relationship banking groups with more than 10 counterparties and geographic and product diversification.
- Short term bank liquidity facilities.
- Commercial Paper programmes
- Larger institutions have unsecured EMTN platforms that allow for access in both the GBP as well as the international capital markets.
- Large utilisation of medium term European Investment bank funding
- Large users of the US Private Placement market
- Unsecured ISDA’s but long dated swaps could rank super senior to senior debt
Financing is on an unsecured basis but certain groups, mainly highly-leveraged water companies, operate under “whole business securitisation” structures to provide debt investors with more robust covenant packages. Some social housing investment strategies have used similar ideas but to a very limited scale so far.
Other regulated entities have traditional corporate structures geared at 60-70 per cent levels. These groups tend to fund the unregulated part of their businesses through holding company debt or through other structures such as leases or project financing.
Large commercial property groups are normally rated A- to BBB- and tend to have the following instruments in their capital structures:
- Large relationship banking groups (with anything up to 30 separate bank relationships) which provide geographic and product diversification.
- A range of syndicated and bilateral bank facilities typically from one to five-year maturities.
- Selected Propcos have secured and/or unsecured EMTN platforms that allow for access to both the GBP as well as the international capital markets.
- Larger Propcos have USD DCM funding arrangements through the public 144A markets
- Large users of the US Private Placement market
- A mix of secured and unsecured ISDA
As housing businesses grow more complex and diverse in nature we expect there to be a continued divergence away from the traditional “one size fits all” nature of their financing. As the legacy treasury issued from pre-2008 wane, this offers treasurers the opportunity to re-consider whether their existing arrangements are fit for purpose and whether lessons can be learned from their counterparts in the utilities and commercial property sectors. As detailed above, we suggest treasury teams to consider a series of liability management and funding initiatives that lead to capital efficiencies.
Clearly, some of these drivers will depend upon the scale, complexity and operating models of the businesses concerned. What is clear is that in a rapidly evolving market, housing sector treasurers will play an increasingly strategic role in re-shaping the way that their business are financed.