Reflections from Brendan Whitworth

This piece was originally published on 27th February, 2024 in Social Housing Magazine.

Amid myriad financial challenges over the past two decades and near constant re-writing of business plans, housing providers’ core purpose has remained unchanged, says THFC’s Brendan Whitworth.

For more than 20 years I have worked closely with housing associations, by arranging funding. In retrospect it is staggering how much has changed during this time, but I am reassured that the sector’s core purpose remains intact.

Having spent more than two decades working with housing associations, it is striking how many huge financial challenges they have had to face.

To name just a few: the fall-out from the 2008 credit crunch, the rent cuts from 2016 to 2020, large swings in inflation and interest rates, plus the increasing realisation of the scale of the investment needed to tackle fire safety, damp and mould, and decarbonisation issues.

Unsurprisingly, few of these events were anticipated in the business plans written by housing associations in the years before the changes.

And even where there was some advance warning, the stress-testing was often for less severe scenarios than subsequently resulted.

Who predicted well in advance that inflation would peak at over 10 per cent in 2022, or that base rates, which had been below one per cent throughout 2009 to 2021, would rise to five per cent?

The lesson I learned from this was that, for all the intense scrutiny of the latest business plan at the time of making a long-term lending decision, these figures could so quickly become out of date.

As business plans and financial forecasts are refreshed at least annually, there could easily be, say, 30 different plans during the life of a loan and where the principal amount is only repaid at maturity.

The management team and board membership will certainly change during that time, too.

Thus, long-term lending decisions require ‘judgement’, recognising the drawbacks of a detailed analysis of projected financial ratios that are based on a ‘point in time’ business plan.

In assessing creditworthiness, I believe that too much weight is given to EBITDA MRI interest cover as a way of measuring financial performance.

To illustrate this, let’s compare two hypothetical housing associations: one that generates £2m cash from its operations (EBITDA) and spends £1m on improving its properties (MRI), while the other generates £1m from its operations but spends nothing on property improvements.

It seems self-evident that the first housing association is financially stronger and yet both have the same EBITDA MRI (of £1m). However, if we regard these housing associations as equal risk then there is the danger that lenders end up penalising those housing associations that wish to accelerate investment in their existing stock.

Instead, I think there is far greater value in considering the EBITDA and MRI elements separately and it is good to see the current trend to using EBITDA-only interest cover covenants. However, it is hard to cover the nuances of this issue in a few sentences.

Another observation is the surprisingly wide variation of approach to credit assessment between funders and credit agencies, with no historical data – there have been no credit losses – to ‘prove’ that one is better than the other.

Naturally, each lender and agency will believe they have the right approach.

Fresh approaches

The greatest joy of my role (apart from working with the great team at THFC) is meeting housing associations and seeing their impactful and wide-ranging work first-hand. This sector is highly innovative, taking fresh approaches to long-standing challenges.

Housing associations are consistently working to address a myriad of important issues, including the provision of desperately needed new social housing, tackling homelessness, working with marginalised groups, and supporting local communities, while also doing their bit to tackle the existential threat of climate change.

All of this is accomplished in an environment where funding is squeezed but expectations and demand keep growing.

It has been both a great pleasure and a privilege to work in the social housing sector throughout the past two decades.

While my perspective is an admittedly narrow one, having focused on credit risk and funding, I have been involved with the sector long enough to be genuinely optimistic about the future of this dynamic and purpose-driven sector.

And in conclusion, while I may have gained some knowledge along the way, I am much more aware now of what I don’t know, compared with when I started.