Those of us who are social housing anoraks or are sufficiently worried about our jobs to want to be constantly reassured that we are not doing anything ‘wrong’ will make sure that they read the regulatory judgements on Registered Providers issued from time to time by the TSA.
Recently, regulatory judgements were published on three of our largest RPs and, unsurprisingly, because they have all achieved excellent results over many years, they received good ratings.
But for people like me, who value highly the continued support of the banks and financial institutions for the social housing sector but don’t want to give them a penny more in interest payments etc. than I/we have to, there were some interesting aspects to the parts of the reports that dealt with treasury management policy which give us an insight into current TSA thinking on this subject
In one of the regulatory judgements, it was reported that the RP’s loan book was 95% fixed as at June 2010 and that this ‘protected the group against the risk of increasing interest rates’. There was no other comment on this subject in the TSA report.
However, by referring to December’s issue of Social Housing, I can see that, in 2009/10, the RP in question had loans of over £1,250 million at an average cost of funds of 6.0%.
So, arguably, if the RP in question had not fixed 95% of its loans and if, by having a much higher proportion of variable rate debt, it had managed to achieve an average cost of funds as low as 3.0% (which some RPs achieved in 2009/10) then it would have saved over £37 million in interest payments in one year.
Now there are two very big ‘ifs’ in the previous sentence and I certainly do not know enough about the history and finances of that very successful RP to make any comment about their treasury management policy. But, given the size of that RP’s loan book and their average cost of funds in 2009/10, one would have expected the TSA report to have said more than they did about the RP’s practice of having 95% of their loans at fixed rates.
In another case, the report states, without comment but presumably with approval, that the RP has ‘loan facilities in place that will fund its current business plan for the next three years, including all committed development’. There might be very good reasons why the RP has facilities in place so far in advance of requirements. But if they have these funds via a bond issue or through a loan agreement with a bank, there will probably be a not inconsiderable ‘holding’ cost involved either in the difference between the interest rate they have borrowed at and the rate they get by investing the unutilised funds or in non-utilisation fees under the loan agreement. Again, one might have expected the TSA to have said more about the possible downside of having funding in place so early.
What, I suppose, is clear from these reports is that the TSA much prefers a strongly risk adverse approach to treasury management. An approach that takes advantage of current low variable rates of interest and seeks to minimise the ‘holding’ costs of loan finance or facilities is not likely to find favour even if it yields ‘savings’. ‘Savings’ which might then be invested in new affordable homes (see below), retrofitting, community initiatives etc.
I have argued before that RPs should be keeping a reasonable proportion of their loans on variable rates on the grounds that a) there is a relationship between interest rates and inflation (they tend to go up and down together) that helps to protect RPs against interest rate rises and b) as long term interest rates are less volatile, there is likely to be time to ‘bale out’ into higher proportions of fixed rate debt if the ‘worst comes to the worst’ and short term rates rise dramatically.
RPs which have followed this line have benefitted considerably from low short term interest rates over the past three years. It will be interesting to see if RPs and their Boards are prepared to keep reasonable proportions (say 40% to 60%) of their debt on variable rates over the next three years if short term interest rates rise. The fact that RPs are increasingly looking to borrow from the bond market rather than the banks will, of course, tend to push up overall proportions of fixed debt.
The Government is once again seeking ‘efficiency savings’ from RPs (see the DCLG consultation paper ‘Local Decisions: a fairer future for social housing’). This time it is to help deliver new ‘affordable homes’ at a time when the amount of government grant available has been severely cut back. Doubtless the regulator will focus, as usual, on management, maintenance and procurement costs. However, most RPs are highly efficient now in these areas and will struggle to extract anything other than fairly minimal ‘savings’.
So it is worth making the point again that, for many RPs, there are potentially far greater ‘savings’ to be made in the area of treasury management and the amounts involved can run into millions rather than tens of thousands of pounds.
But, of course, this would require a less risk averse approach to treasury management from the TSA/HCA if recent regulatory judgements are anything to go by!