Investment manager ARA Venn recently confirmed the funding of three 30-year loans, worth a total of £250m, from a new bond issuance under the government’s Affordable Homes Guarantee Scheme. Liam Turner caught up with the firm’s managing director, Oriane Auzanneau, and partner Richard Green to find out more about how the scheme aims to support the delivery of new affordable homes in the UK
Can you provide an overview of your recent bond issuance?
Oriane Auzanneau: The Affordable Homes Guarantee Scheme (AHGS) is a lending scheme backed by the UK government. We make loans to housing associations, which we fund by issuing bonds in the capital markets. The bonds that we issue under the programme benefit from a guarantee from the UK government.
From an investor’s perspective, they are buying UK government risk, which is low risk, and in turn this drives really competitive pricing, which is passed on to borrowers.
What led to the launch of this particular scheme?
OA: The scheme has been set up to support the delivery of new affordable homes in the sector. Under the scheme we have already issued two bond series and have now funded approximately £650m of loans.
But when the scheme was launched and when the first two bond series were launched, the interest rate environment was quite different. Interest rates were a lot lower. What that means is, as interest rates rose, and have continued to rise, the cash price of those bonds starts to decrease. They currently trade at a discount, which means that if you wanted to borrow £100m, you’d pay interest rates on that £100m, which is lower than the prevailing interest rates.
However, the balancing element of that is that you get lower cash proceeds. Say, if you want to borrow £100m, you get 70p on the pound for the £100m but you pay a lower interest rate on that. That has practical implications and challenges for borrowers to use, and so what we’ve seen is that a lot of bonds that have been issued in that low interest-rate environment now have that challenge, that they’re not really useable by borrowers.
So, it was really important for us to be able to offer something that was fit for purpose for the sector, where we’re able to put together the quantum required for a large bond. So, the bond we issued was benchmark size on day one. That means £250m funded on day one. And that’s due to the attractiveness of the scheme, to be able to gather that level of appetite across borrowers.
If housing providers were to go outside of the scheme, what rate would they achieve?
OA: All of these products, private placements, and bonds are priced over gilts. What really differentiates the products is the margins that you could get. Depending on a particular point in time, margins will vary depending on market sentiment and where the credit is priced.
On the whole, at various points in time throughout the life of the programme, the average benefits of the government guarantee has been in the order of 80-120 basis points (bps). It’s a broad range, and that has varied over time.
One of the other advantages of the scheme is that, because of the strong credit quality (the bonds are rated the same as the UK government’s sovereign credit rating), we have been able to access the market throughout the cycle. And we manage a sister scheme to this one, a scheme focussed on private-rented-sector accommodation.
Historically, we have been able to successfully issue bonds right after COVID, right after Brexit, at times when the markets were really challenging and there wasn’t much lending due to the volatility. This sort of scheme allows access to funding, even in difficult conditions.
There hasn’t been much capital market issuance from housing associations or sector-related in the past few months at all. So, that really shows that one of the benefits of the scheme is that it is really well regarded and able to access the market even when conditions are not the most favourable.
Richard Green: The scale of the scheme helps give us access. Because normally, you’ll need to issue a benchmark bond – a benchmark bond is deemed to be £250m. So, a lot of issuers who have existing bonds, those bonds are probably trading at a discount, and it makes them hard to use. Whereas, a single individual housing association is less likely to have enough funding requirement to be able to do a brand-new benchmark £250m bond.
So, that is a constraint as well, and that makes our scheme more attractive to more people because, even if they might have thought about doing their own bond, the current environment might make that harder for them.
Without bond schemes such as yours, would housing associations find it harder to deliver more affordable housing?
OA: There is a lot of discussion in the sector around the ability to continue to deliver on these ambitions due to the number of market pressures. The pressures are both from the top line – there’s been a rent cap – and on costs, with high cost inflation. That in itself puts some pressure on businesses, on their margins. Well publicised are the conflicting demands on housing associations’ cash balances and capacity for funding – investment into existing assets versus development. And all of this while preserving financial viability.
So, yes, what we are seeing is that there has been a change in pipelines, certainly on the development side. And the feedback we’ve had from our borrowers is that accessing lower cost of funds on the debt side to supplement grant is a really neat way for them to continue and develop homes.
What’s your assessment of the wider economic landscape at the moment?
OA: There are lots of moving pieces. After we issued the bond, there was an announcement that a bank in the US was going bankrupt. On the back of that, there was some concern in the European banking sector. Even if you look at economic forecasts, it is not clear where inflation is going. There seems to be a lot of views as to where that goes from here.
There’s clearly a lot of challenges in terms of the state of the economy. We are past the mini-budget impact on the markets, but there have been a number of other events – not necessarily macro events, but more localised events that have influenced that.
RG: The uncertainty around where things go from here makes people risk averse. So, whether that’s the housing association making the investment decisions it needs to make and how they manage their business, this can make them more risk averse at the moment.
In terms of investors, it can make them risk averse just because the economic outlook is uncertain. People are waiting for more clarity, and I think that clarity will bring a number of benefits. But while there are clearly a lot of clouds, people are just acting cautiously.
As a result of recent economic uncertainty, do you as a lender have to be more careful in terms of who you give out loans to?
RG: Certainly. Just like any other lender, you need to be prudent in your lending. We’re lending over a very long period of time. We put our borrowers through a lot of scrutiny to test their business plans, to test their thinking and their resilience against a lot of different economic scenarios. That’s what you’d expect from any prudent lender, checking the resilience of their respective borrowers against a broad range of economic outcomes.
“We have been able to issue bonds after COVID, Brexit, at times when the markets were challenging – this sort of scheme allows access to funding, even in difficult conditions”
OA: We have a thorough underwriting process. At the same time, we also recognise that the sector as a whole is subject to certain challenges, and that does not prevent us from continuing to support it.
For example, you’ll be familiar with the fact that larger RPs [registered providers] have regulatory gradings, and now more than half of the sector have a V2, which is a compliant grading but which is one notch down from V1. That wasn’t the case 18 months ago.
From our perspective, it’s important to understand how they can manage the risks, and we take that on board. But we’re perfectly able to support a wide range of organisations.
So, even if a provider doesn’t have a V1 rating, you’re happy to work with them as long as everything checks out overall.
OA: Yes, absolutely. We go through our underwriting process, and again, we need to understand how the risks are being managed.
In fact, we have funded organisations with a V2. Governance is really important to us, as well. And echoing the regulator’s perception, V2 can be a perfectly acceptable grade in the long run, especially when it’s combined with a G1. So, it’s about how particular challenges are managed by the organisation.
How do you monitor the borrower’s progress in terms of delivering new affordable homes?
OA: Every lender will monitor their performance in terms of the loan. We have regular contact with organisations, and yes, there is another element that we monitor, which is the progress against the delivery undertakings under the loan in relation to new affordable homes.
We’ve had really good engagement with our existing borrowers. In fact, for those borrowers who are starting to tick off their delivery requirements, we know the scheme has worked really well for them. We know there is appetite generally speaking to use the scheme again. This is something we had seen as well in our sister scheme, the PRS [private-rented sector] guarantee scheme, where the format lends itself really well to repeat issuance.
So, where you have established a good relationship with an organisation, they come back for more funding under the scheme because it’s worked really well for them. We are starting to see that under our AHGS.
How long is left on this current scheme?
OA: The window for applications currently closes at the end of April 2024. Two things to add to that. The government have an option to extend that window, and as you would expect, as you get closer to the end of that window, you start to engage to see whether there is appetite to extend that. But also, that’s the window for applications so funding can be deployed much beyond that, as long as we have received applications before this date.
RG: On our sister scheme with the PRS, they did extend the applications deadline, so government has shown a willingness to do that.
Do you think the same will happen with this one?
RG: It’s the government’s decision, but they are keen to see funds from the AHGS deployed, and so I think they will consider that nearer the time. Their objective is to provide support to the sector. They want to see the £3bn deployed, so you would hope that that would give them good reason to extend the scheme to allow it the best chance to do that.
If they do extend it, would that mean a doubling of the £3bn?
RG: There’s separate choices. Government has that separate choice. Clearly, if it were to do that, it would need to extend the application deadline.
How long does your bond-issuance process take?
OA: We had an issuance in November 2021, May 2022, we tapped that May 2022 series in August last year, and now we’ve issued in March 2023. So, we’ve had three bond series, but that’s four times accessing the markets.
RG: We have three bonds. One maturing in 2051, one in 2052, and one in 2053. And we can reuse each of those bonds if economically viable.
How many more bonds are you planning on issuing under the scheme?
OA: We have really strong appetite from borrowers to borrow under the scheme. We have a strong pipeline. We are at the underwriting stage for a number of applications, and we expect to become semi-regular issuers in the market to fund those loans.
Housing Digital Stakeholder ARA Venn is a specialist investment manager in European private debt with a strong focus on residential real estate, including a consumer residential mortgage lending business, the UK government-backed private-rented sector and affordable homes lending schemes, and other real estate lending opportunities.
Main image: Serhii Krot/Shutterstock
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