(The previous 6 sections can be found here)

HISTORY AND ROLE OF T.H.F.C.
T.H.F.C. was established in 1987 as a result of a joint initiative between the Housing Corporation, the National Housing Federation (“NHF”) and the private sector. It specialises exclusively in raising private sector finance for registered housing associations (i.e. registered social landlords). As an independent financing vehicle T.H.F.C. raises funds by a variety of means including public secured bond issues, private placements and bank loans. By aggregating the requirements of individual housing associations it aims to achieve economies of scale for associations whilst providing a broadly based security portfolio for investors.

CONSTITUTION
T.H.F.C. is incorporated under the Industrial and Provident Societies Acts 1965-1972 as a not-for-profit corporate body with limited liability operating under Rules registered and approved by the Registrar of Friendly Societies (now part of the Financial Services Authority). It is controlled by a six person Board of Directors. The Housing Corporation and the National Housing Federation are both represented on the Board by their respective nominees. The other four members of the Board are selected to represent the private financial and commercial sectors. The Housing Corporation, the NHF and the four independent Board members each hold one fully paid share of £1, in T.H.F.C. These represent the entire share capital of T.H.F.C. although accumulated reserves now amount to £5.6 million.

The Rules of T.H.F.C. state that on a liquidation all the assets remaining after all liabilities have been met must be paid back to T.H.F.C.’s borrowers, past and present, on a basis to be determined by the Board.

SUBSIDIARIES
T.H.F.C. has established a subsidiary service company, T.H.F.C. (Services) Limited which provides all management and administrative services to T.H.F.C. and to its other subsidiaries, details of which can be found here. These are separately constituted entities, wholly owned by T.H.F.C. as non-charging subsidiaries and established to cater for the differing requirements of borrowers and investors.

MANAGEMENT
The senior team responsible for the daily management of the Group consists of professionals with housing, banking, treasury and accountancy backgrounds and qualifications. For details click here. T.H.F.C. has appointed Trowers & Hamlins as Legal Advisers and PricewaterhouseCoopers as Auditors.

PRINCIPLES OF FINANCINGS
T.H.F.C. has used a wide range of financing 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. Without significant exception they have adhered to the following fundamental principles:

• T.H.F.C. has acted as principal, borrowing in its own name and on-lending the proceeds only to registered housing associations; Funds raised have been on-lent immediately;
• Funds have been on-lent on a similar interest and repayment profile thus ensuring that T.H.F.C. takes no risk on interest rate movements;
• No currency risk in relation to its funds has been taken either by T.H.F.C. or its borrowers;
• T.H.F.C. makes its own independent credit assessment of its borrowers and accepts or refuses applications accordingly;
• T.H.F.C.’s loans are fully secured and covenanted to an agreed minimum level, to which T.H.F.C. is legally bound. As an Industrial and Provident Society T.H.F.C. makes interest payments to UK registered investors without deduction of tax.

CREDIT APPRAISAL
The creditworthiness of T.H.F.C.’s borrowers is carefully assessed prior to each loan being approved by the Credit Committee. This process seeks to ensure that T.H.F.C. can maintain its 100% record of full and timely payment of interest and principal to its investors. T.H.F.C. has developed its own credit criteria including a detailed analysis of its borrowers’ accounts drawing out key financial ratios and performance indicators. The credit assessment is carried out in two stages. Firstly when an association first applies to be accepted on to the Approved Association Register its accounts are fully analysed, its rules checked and its latest Corporation monitoring report scrutinised. A meeting with T.H.F.C.’s Business Development Manager will normally take place at this point where management issues and business plans can be fully discussed. The second stage of appraisal takes place before a loan to the association is approved. This involves an updating check on the association, as above, together with an assessment of the viability of the schemes to be funded, consideration of the impact of the proposed loan on the association’s overall finances and on its ability to offer adequate asset and income cover to T.H.F.C. and other lenders. T.H.F.C.’s level of exposure to individual associations is also taken into account. T.H.F.C. does not consider that size should be a determining factor in an association’s ability to attract and support private finance. T.H.F.C.’s analysis of associations’ creditworthiness has demonstrated no direct correlation between the size of the association and its financial strength. Many medium-sized and smaller associations have modest development programmes well within their managerial and financial capacity. They add geographical and asset diversity to the T.H.F.C. portfolio which encompasses associations ranging from those with over 20,000 homes in management to those with less than 500.

For details of the THFC Group loan portfolio click here.

ASSET COVER
T.H.F.C. requires that a minimum of 150% asset cover is maintained for all its loans throughout their life, i.e. its loans are one and a half times covered by net assets. Asset cover is defined as housing land and buildings at depreciated cost in the balance sheet (or at valuation by a T.H.F.C. approved valuer) less 1.5 times all secured loans other than those made by T.H.F.C.

T.H.F.C. lends on two forms of asset security. Either T.H.F.C.’s loan is secured by a floating charge, i.e. a charge over all the assets of the borrowing association, and the association can dispose of charged property in the normal course of business provided that covenanted asset cover levels are maintained, or T.H.F.C.’s loan is secured by fixed charges over specific properties of the borrowing association and the association may only remove charged assets provided substitute security (where necessary) is provided in the form of property or cash.

Where an association’s security is based only on fixed charges T.H.F.C. requires a current open market valuation of the charged property in its tenanted state. Typically this will produce a valuation of between 50% and 70% of the vacant possession value of the same property. T.H.F.C.’s secured loan must accordingly represent not more than 2/3rds of the tenanted value of the charged property. Within 18 months of loan draw down 90% of the associated fixed charges must be provided through fixed charges on property.

In cases where floating charges are provided as security, T.H.F.C. requires a similar tenanted valuation of the charged property if the asset cover for the loan in question calculated by reference to balance sheet values falls below 300%. The balance sheet calculation of assets for this cover test includes housing land and buildings at cost, adds net current assets and deducts both provisions and 150% of all other secured loans.

T.H.F.C. has to date typically required that associations providing floating charge security also give fixed charges in favour of T.H.F.C. over the properties on which T.H.F.C.’s loan is utilised. This is, however, not an obligation required by the terms of the Trust Deeds under which T.H.F.C. operates. Associations have the option to switch from floating to fixed charge-only security and vice versa with T.H.F.C.’s consent and subject to fulfilment of the appropriate covenants, including execution of any necessary deeds of variation to change the borrower’s loan agreement.

Following amendment to THFC’s trust deed arrangements, in certain circumstances, THFC is now able to offer borrowers who have taken out loans derived from the same stock, globalisation of security arrangements. This enables borrowers to aggregate security portfolios, allowing for greater asset efficiency.

INCOME COVER
T.H.F.C.’s loan documentation incorporates a number of provisions to ensure that all associations are able to make full and timely payments of principal and interest. Where fixed charges provide the sole security, at least 100% income cover must be certified on the basis of the rental income from the charged schemes after deductions for management and maintenance costs. Where floating charges are granted, at least 100% income cover must be available from within the income and expenditure account of the association.

Timing of payments
In order to provide a further cushion, for example against possible administrative delays in payments, T.H.F.C. requires its borrowers to make interest payments to T.H.F.C. one month ahead of T.H.F.C.’s own obligations to pay interest to investors. T.H.F.C. retains the interest earned on the cash during the month as an additional source of income and future reserves.

Other T.H.F.C. on-going monitoring requirements
T.H.F.C. requires that regular financial and operating information is made available by borrowing associations. This includes monthly reports on utilisation of loan funds, copies of performance assessment reports by the Corporation, annual reports and accounts, annual auditor’s certification of asset and income cover and semi-annual certificates of compliance with non-financial loan covenants.

Five yearly revaluations of properties are required to ensure income and asset cover requirements are met.

As is the case with T.H.F.C., borrowers with T.H.F.C. (Social Housing Finance) Limited (‘SHF’) may give security by way of either a fixed charge or a floating charge.

A floating charge borrower must give a floating charge over all its undertakings and assets, present and future. Underlying fixed charges must be created by the second anniversary of the signing date of the loan over real property with an annual gross income equal to the interest due under the loan.

Where the fixed charge route is taken, the borrower may elect to value the fixed charge security portfolio on either an Open Market Value (‘OMV’) or Existing Use value (‘EUV-SH’) basis. Whichever basis is chosen must then apply for the total security package for the relevant loan facility. It is not permissible for a blend of OMB and EUV-SH basis to be used within the same security package. The valuation must provide for a minimum of 1.35 times asset cover for OMV valuations and 1.15 times for EUV-SH basis. Where any units are removed from the fixed charge security portfolio, substitute security (either in the form of cash or property) must be provided where the asset cover is below the permitted security withdrawal threshold.

In order to offer flexibility to investors and borrowers, other subsidiary entities of T.H.F.C. were created as industrial and provident societies, limited liability companies and public limited companies, as appropriate. Borrowers from each of these entities have to meet the specific asset cover, income cover or cash flow obligations set out in their loan agreements. Potential borrowers from, and lenders to, T.H.F.C. and its subsidiaries can access full details of these requirements by contacting T.H.F.C.’s offices at enquiries@thfcorp.com

Lenders to T.H.F.C. benefit from a floating charge over T.H.F.C.’s assets which are primarily its secured loans to associations but which also include its reserves. Thus investors’ ultimate security is derived from the asset coverage provided by the borrowing associations as described above. All T.H.F.C. stocks and loans rank pari passu and are further protected by a negative pledge. T.H.F.C. covenants to its investors that it will maintain total operating expenditure within total income on a rolling three year basis.

T.H.F.C. is prevented by the terms of its Trust Deeds from on-lending to associations on weaker covenants than those specified. This form of security was designed to enable all investors to spread their risk across the whole range of instruments and borrowers who are widely distributed both geographically and by size.

The security offered by T.H.F.C. has enabled it to attract a 50% risk capital weighting from the Bank of England in line with the 50% weighting on direct secured lending to housing associations.

T.H.F.C. covers its own administrative costs by charging fees on its lending operations. It has successfully operated in surplus since its incorporation in 1987.

At 31 March 2002 T.H.F.C. had accumulated consolidated reserves of £5.6 million and because of its not-for-profit status these remain as non-distributable liquid reserves.

The latest THFC Group Balance Sheet and Profit and Loss Account can be seen here.