Summer Budget: Navigating a new financing landscape

Summer Budget: Navigating a new financing landscape

It has been an interesting few years for the social housing sector. The retrenchment of the banks from the sector in the immediate aftermath of the credit crunch paved the way for housing associations to diversify their sources of capital. In more recent times, many associations have been spoiled for choice, with the public and private capital markets offering abundant long term liquidity at record-low prices, and even the banks regaining their appetite to push harder on tenor (if not at historic low margins).

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Summer Budget: Navigating a new financing landscape

But the Chancellor’s triple-challenges of rent cuts, Right-to-Buy and Pay-to-Stay have changed that financing landscape for the sector once again.  From a financing perspective, the Budget could ‘bite’ on a number of levels: 

  • Managing existing debt stakeholders: Does the Budget create covenant pressure, credit rating sensitivity or going concern risk, and how can negotiations with debt stakeholders be optimised to create the headroom and flexibility required without compromising other financing terms (including price)? 
  • Funding gaps and surpluses: Does the Budget create a funding gap (e.g. driven by revenue shortfall) or a funding surplus (e.g. where debt was raised for development or acquisitions that are no longer economical), and what does the association need to change within its business or financing strategy to plug a funding gap or mitigate carry costs of excess funding? 
  • Availability of new financing: As housing associations reconsider their business plans, and debt investors across the bank, private placement and bond markets demonstrate signs of nervousness towards the sector, how can associations effectively evaluate the appropriateness of various financing options and the optimal timing to launch a financing process? 

One thing is clear: the Summer Budget has shown that it is impossible to know what lies ahead. The cornucopia of funding options that housing associations have grown accustomed to appears to have gone, at least in the near term. And those associations which, in the recent past, have prioritised borrowing the most money they could get, at the cheapest price possible, for the longest tenor, may now have to re-evaluate their financing strategies in favour of options which provide greater flexibility for a more uncertain future. 

To discuss how KPMG is supporting housing associations in navigating post-Budget financing challenges, please contact Marc Finer in the Capital Advisory Group.

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