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 registered social landlords 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. These 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 THFC Group has benefited from the period of stability that has followed the major changes of 2002/03 which followed that review. The new executive team, which was completed in the autumn of 2003, has established new working practices that allowed improved internal controls to be applied to our existing businesses.

The quality of these controls, our detailed credit-scoring review of both existing and prospective borrowers, the asset and income security we require in our loan agreements and the unblemished payment history of THFC’s customers allowed us to achieve an investment grade rating for the THFC Group of A+ awarded by Standard & Poor’s (S&P).

In awarding this, the first rating for the THFC Group, S&P commented: “The A+ rating assigned by S&P reflects THFC’s strong capacity to meet its financial commitments. The rating is supported by THFC’s prudent lending policy to creditworthy counterparties, a strong level of over-collateralisation
and good management”.

This rating reflects the benefits to the sector from THFC’s aggregating and intermediation activity between those wanting to invest in social housing and the Registered Social Landlords (RSLs) themselves.

Our experience is that the average equivalent rating for the sector tends to be BBB+. By establishing a strong rating we have demonstrated our ability to add value to a sizeable proportion of the RSL sector. Having established this ratings base line we are planning to add structural enhancements to future bond issues so as to deliver a competitively priced alternative to bank financing in the current year.

In January 2003 we negotiated with our lenders several changes to our trust deeds that have allowed us to inject greater flexibility into our funding programme. These changes permitted 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. These changes allowed us to lend a further £9 million in 2003/04 and to create a further lending pipeline of £15 million, all of which was raised from our relationship banks. The proceeds were on-lent to five RSLs. THFC customers who prefer the flexibility of bank sourced financing will continue to be serviced by the provision of approximately £40 million of new loan facilities currently being negotiated by THFC. At the year-end the Group was the provider of funds to 132 borrowers, a number of which belong to the same group. A full list of borrowers can be seen here.

Management of our existing loans portfolio is an essential part of THFC’s after-sales service. A number of borrowers of the proceeds of THFC’s 11.5% 2016 stock issue have been seeking ways of prepaying their debt without incurring the onerous penalty incorporated in the ‘Spens’ formula. This formula charges a borrower with the economic difference on its loan between the prospective yield to maturity for the lender and the yield on a gilt edged stock of similar maturity. Such a formula implies that the lender is unable to re-invest any prepayment proceeds at other than gilt yields without increasing its counterparty risk, and is a condition of many of the early bonds issued by THFC. Working with certain borrowers, our bond trustee and our legal advisers, we were able to structure an effective pre-payment route through the purchase and redemption of bonds bought in the market that lessened the pre-payment penalty for borrowers. As a result £19.5 million (face value) of 11.5% 2016 bonds have been redeemed to date and our associated loans to borrowers prepaid. We intend to continue with our efforts to find ways to reduce the burden of our loan portfolio on our borrowers when market conditions make it possible.

Our service company, T.H.F.C. (Services) Limited (THFCS), provides administration services to all THFC Group companies and to certain third party lenders to the social housing sector. It is part of our business strategy to develop these services where possible to capitalise on the economies of scale possible in bond and loan management. We also recognise the importance to customers of the consistent provision of a high quality administrative service over the long expected life of housing association bonds. During the year we were awarded the servicing role for Harbour Funding plc (a consortium bond for Large Scale Voluntary Transfers (LSVTs), lead managed by RBC Capital Markets). This brought THFCS’ serviced portfolio to just under £1.3 billion, (£650 million of which resides in THFC’s loan portfolio on its balance sheet, but is classified as a serviced portfolio), making it one of the largest providers of third-party administration services to the sector in the market. As a result of this contract and certain changes to other third party managed companies’ contracts our income during the year from this activity rose from £50,000 to £166,000. THFC’s loan book stands at £1,488 million with £1,300 million of third party loans under management. Although the amount of new business was modest, careful cost control ensured that the Group finished the year with a useful pre-tax surplus of £189,000 (2003: £60,000).

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, although we project that we are now able to break even before any contribution from new lending or additional managed-company income.

At the end of last year Norman Perry, The Housing Corporation’s nominee Director, stepped down from the Board on his retirement as the Corporation’s Chief Executive. He leaves with our grateful thanks for his support and guidance through the year as THFC implemented its change programme. His position has been taken by the Corporation’s new nominee, Mr Jon Rouse, who replaced Dr Perry as its Chief Executive. Mr Rouse’s appointment continues the effort by the Corporation to develop the interchange of information and views between itself and THFC, which is proving to 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 hard work during what has proved to be another demanding year for THFC. As a result of their efforts we have emerged from our recovery phase and are well placed to develop further THFC’s role as an effective financial intermediary.

David Creed
Chairman
21 June 2004