The role of aggregators
The funding market for social housing is now so firmly established that it is easy to forget that there was a time when the sector did not have the wide range of funding sources that it does today.
In the past two years, associations have filled their boots with extraordinarily cheap, long-term capital markets funding, which now accounts for almost 50 per cent of the sector’s total debt. But it was not always thus.
THFC was founded in 1987 by the National Housing Federation and the Regulator of Social Housing, then the Housing Corporation, precisely to provide routes to the debt capital markets, which almost no association was then in a position to access.
Ever since then, aggregators have been a key part of the funding landscape for associations, which are now served by two others alongside THFC.
While the role of aggregators in the sector is inevitably shifting due to more associations opting for own-name issues, the need for their services is arguably bigger than ever.
The core purpose – access to competitively priced long-term debt – remains the same.
This competitive pricing is possible partly due to the frequency and volume of issuance, which gives aggregators a number of advantages.
The frequency also allows aggregators to build unrivalled knowledge and relationships with institutional investors.
Scale is built through the combination of multiple associations into a single issuance, but also smaller issues can be achieved through regular taps.
Investors are familiar with this model, which offers more flexibility than the format of a single benchmark issue commonly found in own-name bond transactions. This is why eight of the top 10 largest bonds in the sector are aggregator-issued.
The aggregation model, which many will have heard me affectionately refer to as “herding cats”, is also based on the concept of spreading exposure.
An established aggregation vehicle will be comprised of a varied range of associations and essentially reflect exposure to the sector as a whole. This allows investors to mitigate against the risk of direct exposure to a single association as when purchasing own-name bonds.
Many investors will not even consider sub-10,000 unit associations, hence the enduring need for aggregation.
For a borrowing association, aggregation provides access to debt with a cost and covenants comparable to public bond terms.
The latter is proving to be of particular significance in the context of decarbonisation and the pressure on EBITDA covenants in bank loans and private placements.
This gives an established aggregator a level of expertise and knowledge in both debt capital markets and social housing that constitutes a unique resource.
With this expertise, and the strength and breadth of the relationships built up over decades, aggregators function as hubs of knowledge-sharing and innovation.
Aggregators have driven changes in the use of deferred drawdown structures, social and sustainability bonds, retrofit funding and guaranteed debt issuance.
Of course, innovation comes from all quarters, with L&Q’s recent sustainability-linked bond being a good example. Yet while individual borrowers are first and foremost concerned with meeting immediate funding needs, aggregators can often be more strategic.
THFC, for instance, being a non-profit-distributing entity, is able to reinvest profits into projects and ventures that have a positive impact in the sector, such as its recent report on retrofit funding routes.
Indeed, retrofit perhaps best exemplifies the continued value in aggregation models. Unlike development financing, retrofit requires relatively small amounts spread over longer periods, making it less suited to benchmark own-name issues.
As retrofit, again unlike development, does not create a financial return, it is best funded through low-cost capital markets funding. To whom does an association turn for low-cost, long-term capital markets debt in small amounts? An aggregator, of course.
So, despite the return of the mega-merger, the sector’s aggregators are continuing to grow and expand. They will continue to sit at the very heart of the sector and represent it in all its glorious diversity.
With the increased sustainability focus of investors, the expertise of aggregators constitutes an invaluable resource, but equally and most importantly for those bottom-line purists, the debt remains as cost-effective as ever.
After 20 years at the helm of THFC, then, I feel as excited as ever about the future of social housing aggregation.