Until this year the business model adopted by THFC has remained substantially unchanged since its inception in 1987. Our success in that period was driven by a rapidly expanding social housing sector which sought funds to support its expansion, but which had relatively little choice in raising finance. THFC’s role as an aggregating financial intermediary enabled housing associations to access primarily capital market sources of finance which would otherwise have been closed to them.

During the last year the Board of THFC has reassessed THFC’s position. THFC continues to be positioned as an important bridge between the needs of institutional investors and those of the main bodies tasked with expanding the availability of affordable housing - registered social landlords (RSLs). Nevertheless, the funding choices available to social housing borrowers are broader today.

To be effective in an increasingly competitive market, changes to the way THFC operates have had to be made to realign THFC as a potential generator of fresh funding initiatives and help our borrowers to make the most of their security.
The first task for the Board was to find a new chief executive to lead the THFC Group. I am pleased that Piers Williamson, who joined THFC in July last year as Deputy Chief Executive, was promoted to the position of Chief Executive in October 2002. He has made a sound start in implementing the new direction for THFC. His appointment to the Board of THFC in January this year reflects the confidence the Board has in his management of our business. Following his appointment as Chief Executive I relinquished all executive responsibilities during October.

At our strategic review in July 2002 the Board re-affirmed its decision that THFC’s primary role should remain the provision of finance to the social housing sector, recognising that as the role of RSLs broadens this is likely to include the potential to finance projects which reach beyond ‘classic’ social housing and into wider regeneration. To meet the changing needs of our customers and to remain effective against the competition from other funds providers, substantial changes were agreed as essential. The changes are being driven by an approach which emphasises the importance of understanding our market, builds flexibility into our borrowing and lending practices and reinforces the professionalism of THFC’s management and staff.

The immediate action taken has been to recruit a senior management team with the experience and determination to reposition THFC in the eyes of investors and our customers. Our aim is to ensure that while efficiently administering the existing debt portfolio, THFC will direct itself towards developing new funding themes appropriate to the future needs of the wider social housing sector.

To inject greater flexibility into our funding programme we have negotiated with our lenders several changes to our trust deeds. These changes allow us to use the security of charged properties more efficiently, enabling some of our existing customers to borrow greater amounts without increasing their charged property portfolio. We have also made changes to one of our operating covenants to give associations greater flexibility in meeting their compliance statements. Finally we have improved the potential liquidity and hedging flexibility for certain of our investors by changing the basis on which two of our bond issues may be prepaid. I am pleased to report that we achieved all this with the overwhelming explicit support of our lenders and investors, who voted for these changes in a series of extraordinary general meetings of bondholders. We are grateful for their continuing support. We will continue this programme of changing THFC’s existing loan portfolio, where we believe such changes are appropriate, so as to meet the needs of both borrowers and lenders more effectively. A second key part of our development programme aims to achieve a public credit rating for THFC’s debt, for which preparations are well in hand.

In last year’s annual report I referred to Education Capital Finance (‘ECF’), the aggregating financial intermediary that was set up in 2000 by the Further Education Funding Council, the Association of Colleges and THFC with the objective of making loans to Colleges of Further Education. As foreshadowed in my report, the project has now been closed and the two ECF companies liquidated. The project was successful in acting as a catalyst for the substantial reductions in the lending margins offered to college borrowers by lending banks in response to the new competitor. This has had the effect of driving down the cost of borrowing to all Colleges of Further Education and in this respect ECF has been successful. Nevertheless it remains to be seen how the banks will respond now that ECF has withdrawn from the market. We hope that effective competition between the banks will be maintained. I would like to record my thanks to Peter Impey and his employer, Partnerships UK, for their continued support of ECF during its wind down phase.

THFC’s loan book stands at £1,485 million with a further £430 million of third party loans under management, a slight increase from last year. Despite the lack of new business and the costs incurred in our repositioning exercise, the Group finished the year with a small surplus. Our objective remains that of generating a sufficient surplus each year to achieve a steady progression in THFC’s financial reserves. With the current level of THFC’s overheads this is only comfortably achievable through the generation of new business each year. With this in mind it is expected that the lending programme will restart in the second half of the 2003-04 financial year with the aim of ensuring at least a small incremental surplus in the current year.

At this year’s Annual General Meeting Peter Cooke, who has served on our Board since the end of 1997 as The Housing Corporation’s nominee, steps down. He leaves with our sincerest thanks for his invaluable support and steady guidance through what has been a difficult time for THFC. His position will be taken by the Corporation’s new nominee, Dr Norman Perry, who is Chief Executive of The Housing Corporation. Dr Perry’s appointment will help to foster the growing interchange of information and views between THFC and the Corporation, the continuation of which will be a key element in the success of THFC’s new business initiatives.

My thanks go to members of the Board and the staff for their perseverance during what has proved to be a challenging year for THFC. As a result of their efforts we now have the necessary platform to develop further THFC’s role as an effective financial intermediary.

David Creed
Chairman
23 June 2003