Saturday, 29 April 2017

Warning signs

A recent spate of ‘vulnerable to deterioration’ judgements has prompted grumblings that the housing watchdog is handing out tougher rulings. So is it? The Tenant Services Authority’s Jonathan Walters reveals all

Regulatory judgements are one of the key ways in which the housing regulator communicates its views about the sector and individual landlords to the wider world. The Tenant Services Authority, like the Housing Corporation before it, publishes regular judgements on providers that are regarded as key documents by a range of stakeholders including lenders, credit rating agencies, local authorities as well as the boards of providers themselves.

These documents contain the TSA’s view of whether the provider meets its governance and financial viability standard and contain separate judgements on both the viability and governance of the organisation. In recent times, some of the gradings have generated headlines suggesting that the regulator is becoming harsher in its approach to grading the sector, specifically handing out more J2 ratings, used to denote a landlord which meets expectations but is ‘vulnerable to deterioration’. This is far from the case.

The TSA uses a four-point scale when making viability judgements - J1 to J4. The first two of these confirm that the provider is meeting the regulator’s expectations, while the last two indicate a failure to meet our standards. This is the same four-point scale used by the Housing Corporation and is well understood by lenders and providers alike.

The split of judgements across the sector has remained constant for the past few years. The table shows the percentage split across the four viability judgements over the past three years. It shows that since the 2008 credit crunch, roughly a third of the sector has received a J2 viability judgement. Although the individual associations receiving a J2 will vary, the numbers are consistent.

Clear trend

The most significant change in the grading of providers came in 2008 when the number of J2 gradings rose from around 20 per cent of the sector to the current position of around a third. This was not a reflection of any change in approach by the regulator but was an inevitable consequence of the more difficult trading environment that providers faced, and have continued to face since then.

Receiving a J2 viability judgement from the TSA does not mean that the regulator regards the organisation as likely to fail. It does mean that there are a range of risks that, if not managed successfully, could have a negative impact on the provider’s viability; for example, if an organisation’s credit lines only extend for 12 months. The criteria used to reach this conclusion have been consistent for the last few years and are centred on the underlying financial strength of the organisation and how likely it is to deliver the assumptions it has used to develop its business plan.

It is very rare for a J2 rating to convert into a J3 as organisations are usually able to manage the risks involved. In the small number of cases where this is not possible the regulator is able to intervene effectively.

Spotting risks early

The reason a J2 viability judgement is considered to meet the TSA standard is that our analysis shows there is no immediate threat to the provider’s financial viability, but there are business risks above the norm which need to be managed actively. Many of these risks relate to normal business activities undertaken by providers, whether it is, for example, building new homes, engaging in regeneration activity or taking transfers of stock from local authorities. It would not be appropriate for the regulator to seek to eliminate risk from the sector; rather, we should concentrate scarce resources on robust identification and management of risk by providers.

Having a J2 viability judgement from the regulator is not a bad-ge of shame. It shows an organisation has risks it is currently managing and that the regulator is alert to that.

To maintain the confidence of stakeholders it is important the regulator keeps a consistent and robust approach to assessing organisations. This means we will always need to identify providers with additional risks and this will not change when responsibility moves to the Homes and Communities Agency next year.

Jonathan Walters is deputy director of regulatory operations at the TSA

Housing association viability judgement ratings

J1: meets expectations67.063.064.7
J2: meets expectations but with exposures31.335.634.1
J3: concern1.71.41.2
J4: serious concern000

Case study: handling a ‘vulnerable’ ruling

Trafford Housing Trust, a 9,000-home stock transfer organisation, received a ‘vulnerable to deterioration’ judgement from the housing watchdog in February. Here, chief executive Matthew Gardiner describes his response:

‘The Tenant Services Authority’s regulatory judgement is an important document. When it was issued, it said our business “had exposures that made it vulnerable to deterioration”. But what does that really mean for a six-year-old organisation at a time of economic austerity?

‘It is a well-accepted pattern that new stock transfers always get the “vulnerable to deterioration” strapline. We knew ahead of publication that ours would again say that, despite our business plan having more headroom than ever before. We also suspected that it would gain some press coverage as a result. Despite our transfer promises to tenants being met; despite the fact we have trimmed more than £1 million from our running costs in 2010/11 (when turnover was around £35 million) and despite our programme of stock improvement achieving decent homes standards within the required timescale, we have still to reach the point where we start to repay debt.

‘Yet we don’t believe the underlying business is in any way suspect or “vulnerable” (well, no more vulnerable than any other housing association managing the potential impacts of more than 35 changes to the benefit system over the next three years). That we haven’t reached peak debt is entirely down to the fact that we work our assets hard (as successive regulators have encouraged us to do) and that as we work in an area of significant housing need, we have chosen to raise around £20 million in new debt to maintain our current development levels and build around 300 homes over the next three years.

‘So the impact of the judgement? We had to spend some time fielding calls from and making calls to key partners. For example, the local council with which we are delivering a major project of more than 1,000 new homes rang to enquire if we could continue with it.

‘Developer partners needed reassurance that our partnerships were unaffected (we watch their credit standings carefully, so it was no surprise that they do the same).

‘The press showed some, passing, interest. And within the organisation, while the board and senior team understood the judgement’s meaning, there were questions and anxieties from more junior staff to deal with.

‘Even though this was the same judgement we’ve always received, the context this time was different. For a week or so effort was diverted towards managing the message and away from delivering for customers.

‘It was a different story with our bank; being close to the trust, it understood our finances, recognised the true strength of our stock, management, balance sheet and revenue streams and came back with encouragement to borrow more money for further development.

‘So a clearer explanation of the TSA’s judgement straplines would be a good thing (as would a guaranteed week’s notice of their publication date to help get internal and external communications in place). In austere times we are all “vulnerable to deterioration”; but that’s not the test. We face a world of significantly increased risk - the real test is whether boards and executive teams have plans in place to prevent that risk from crystallising.’

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