Since the incorporation of The Housing Finance Corporation (THFC) in 1987 various subsidiaries have been created within the THFC Group (the Group) to cater for the different financial instruments and covenant structures which have been required over time. THFC itself and all its operating subsidiaries operate on a non-profit-distributing basis. They carry out the core function of raising private sector loan finance for registered social landlords to further their work in developing or refurbishing housing for people in housing need. A further Group member, T.H.F.C. (Services) Limited (THFCS) provides management services to the rest of the Group and to third parties.

The Group organisations are each controlled by a Board consisting of the same non-executive Directors (short biographies of the current Directors can be found here), with the exception of T.H.F.C. (Capital) PLC which has an additional Director, John Shinton of the Royal Bank of Canada. The Housing Corporation, the public sector corporation which acts as regulator and principal distributor of social housing grant, holds a share in THFC and has nominated Peter Cooke to the Board. Other Directors are selected for their expertise in the fields of finance, commerce and housing and include the Chief Executive of the trade body for registered social housing, the National Housing Federation.

The professional team includes executives with banking, accounting, treasury and legal qualifications. The team has recently been strengthened in response to the departure of Peter Impey who was our Head of Credit and the decision to keep more closely in touch with housing associations' needs.

THFC and its issuing subsidiaries, T.H.F.C. (Indexed) Ltd., T.H.F.C. (Indexed 2) Ltd., T.H.F.C. (First Variable) Ltd. and T.H.F.C. (Social Housing Finance) Ltd have between them issued financial instruments including zero-coupon, deep-discounted, index-linked and conventional public debenture stocks, stepped and par-coupon private placements and fixed and variable rate bank loans. Despite the variety of loan structures they all adhere to the same fundamental principles:

• Funds are raised solely on behalf of registered social landlords
• Funds raised are on-lent immediately
• Funds are on-lent on a substantially identical maturity, interest and repayment profile thus ensuring that no mis-matching risk is taken on interest rate movements
• No currency risk in relation to its funds is taken by the Group or passed on to its borrowers
• Loans are fully secured and covenanted in accordance with the terms of the individual Group member's governing Trust Deed
• The Group makes its own independent credit assessment of its borrowers and accepts or refuses applications for funding after a careful review by a Credit Committee comprising senior executives, the Executive Chairman and an independent Director.

Lenders to each organisation benefit from a floating charge over its assets, which are primarily its secured loans to registered social landlords but which include any reserves accumulated from income. All the stocks and loans rank pari passu and are protected by a negative pledge. This form of security was designed to enable investors to spread their risk across a growing range of instruments and borrowers.

Although one of the benefits of THFC's standard loan terms is to offer registered social landlords the ability to secure their loans by way of floating charges - subject to appropriate asset cover tests - many borrowers continue to prefer to provide fixed charge security on specified properties. Most new borrowers choose to adopt fixed charge security from the outset and during the year a further four borrowers have switched from floating to fixed charge security. THFC approves the valuers used by borrowers in order to ensure a consistent and adequately detailed approach which takes account of the physical condition, the future rental potential and the market context of the property being valued.

THFC's exemplary record of prompt collection and payment of interest and principal has remained intact over its fifteen year history. Borrowers' payments are made one month prior to THFC's obligation to pay investors thus providing a timing cushion and a source of additional investment income.

Each borrower undergoes a credit review prior to a loan being granted which involves accounts analysis, review of business plans and projections, scrutiny of regulatory and audit reports, comparison of performance indicators and an assessment of management capabilities. This provides the basis for regular credit monitoring and quarterly reports to the Board on the health of the portfolio. New or increased credit exposures are reviewed and approved or rejected by THFC's Credit Committee, an executive committee comprising the senior executives of THFC and one nominated Board member (Jim Coulter). The financial health of registered social landlords continues to be under pressure from higher gearing ratios, restrictions on rental growth and pockets of low demand underlining the need for a strong internal credit function to complement the regulatory function of The Housing Corporation.

These Group entities were structured differently from the issuing subsidiaries. UK Rents (No.1) PLC is a special purpose vehicle established in 1994 solely for the purpose of issuing a triple A rated rental securitisation. T.H.F.C. (Capital) PLC was established in March 2001 to act as a conduit for funds raised for the transfer of housing stock from Sunderland City Council to the Sunderland Housing Group. The loans to Sunderland are structured on a non-recourse basis and the property security is held by a Security Trustee for the benefit of the bank lenders and investors.

THFC and its issuing subsidiaries each covenant to their respective investors that they will maintain total operating expenditure within total operating income on a three year basis. They have all successfully complied with this covenant since incorporation and by generating fee income, investing "month-early" interest payments, investing reserves and exercising tight cost control the Group has now accumulated non-distributable reserves amounting to £5.6 million.

Under existing U.K. law and practice, payments of interest on debenture stock issued by THFC and its issuing subsidiaries may be made gross to U.K. resident stockholders.

Since October 1999 THFCS has provided loans administration and company secretariat services to Haven Funding PLC and Haven Funding (32) PLC which as at 31 March 2002 had issued £429.9 million in loans to 21 registered social landlords arranged by the Royal Bank of Canada. In November 2000 THFCS also entered into a management contract with Education Capital Finance PLC (ECF), an independent intermediary which lends capital finance to Colleges of Further Education. THFCS is responsible to the Board of ECF for marketing, loans origination and administration. The management fee has been waived by THFCS since January 2002 as part of the support arrangements agreed between ECF and its sponsors.