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 and all its lending 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 structure of the Group is set out here.

The Group’s organisations are each controlled by a Board consisting of the Group’s Chief Executive, Piers Williamson, and six non-executive Directors (short biographies of the current seven Directors can be found on pages 18 and 19). T.H.F.C. (Capital) PLC has an additional Director, John Shinton of the Royal Bank of Canada. The Housing Corporation, the public sector corporation which acts as the regulator of registered social landlords and principal distributor of social housing grant, holds a share in THFC.

The Corporation nominated Mr Jon Rouse to our Board to succeed Dr Norman Perry on his retirement as the Corporation’s Chief Executive at the end of March 2004. 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 housing associations, the National Housing Federation.

The THFC management team is led by Piers Williamson, an experienced treasurer and banker, who joined us two years ago. The team includes other executives with a broad range of banking, accounting and treasury qualifications. Fenella Edge joined THFC to undertake the new position of Group Treasurer in November 2002. She has an extensive background in Treasury risk management and, within THFC, has responsibility for lending and treasury management operations including the negotiation of institutional and customer funding agreements. She is supported by Simon Hatchman who has been with us for two years, and Colleen Green who joined us in August 2003 from The Housing Corporation. The team has been building closer relationships with our housing association customers during the year and this has led us to a better understanding of their needs.

Colin Burke was recruited to the position of Company Secretary and Finance Manager in October 2002.

He has a background in financial control, gained in the media industry. Earlier that year we recruited Deborah Barland to act as our Business Strategy Manager. Like Colin Burke, she has an accountancy background, but has specialised in business analytics. Her skills form an important part of THFC’s approach to portfolio and data analytics and she has led our work in achieving the credit rating from Standard & Poor’s.

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 material mis-match 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 relevant 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.

The security which THFC and its issuing subsidiaries offer to their respective investors is illustrated on page 10. 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.

Whilst 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 - the preferred market norm is now 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 five borrowers 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 seventeen-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. A bespoke credit-scoring model has been implemented which ranks all current and prospective borrowers against a number of parameters. This model enables internal ratings to be derived for each borrower and a default probability to be estimated. The assumption of a loss given default ratio allows the likely maximum loss in any financial year to be assessed. This exercise is an integral part of the credit assessment process and a necessary step in the maintenance of THFC’s credit rating. Credit scoring, together with reviews of credit information and customer visits provides the basis for regular credit monitoring and 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 senior executives of THFC and one nominated non-executive Board member.

The financial health of registered social landlords continues to be under pressure from rising gearing ratios, restrictions on rental growth and pockets of low demand.This underlines 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 rolling basis. They have all successfully complied with this covenant since incorporation.

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 £5.7 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 secretarial services to Haven Funding PLC and Haven Funding (32) PLC which as at 31 March 2004 had issued £429.9 million in loans to 21 registered social landlords arranged by the Royal Bank of Canada.

Since March 2001 THFCS has provided management services to the Sunderland Housing Group in administering Sunderland (SHG) Finance PLC and its parent company.

In August 2003 THFCS was appointed loans administrator to Harbour Funding plc, a special purpose vehicle that issued bonds into the UK market and lent the proceeds of £181 million to three registered social landlords (RSLs). In March 2004 a further £75 million was lent to an additional RSL.