Landlord to have ‘serious discussion’ with lenders over structure collapse
Spectrum holds out for 2014 restructure
‘Based on 2006 logic it was a perfectly reasonable assumption that we could further collapse the group in the long term…that we would be able to re-finance the new group on more advantageous terms and make further efficiency savings,’ says Wayne Morris, chief executive of Spectrum Housing Group.
The 18,000-home association, based in Christchurch, Dorset, which has a budgeted turnover of £92.16 million, was formed as a merger of Spinnaker Housing Group and Signpost Housing Association in 2007. The deal brought together four housing associations and two commercial subsidiaries, saving £4 million to date.
Mr Morris, formerly chief executive of Spinnaker, planned to go further and collapse the new group’s structure, sweeping away four separate boards by 2012. But then the financial crisis ‘got in the way’, says Mr Morris.
Landlords planning to alter the structure of their business by collapsing subsidiaries into their parent companies are required to inform creditors if they are to avoid breaching covenants on existing loans. If they are to make significant savings from a re-structure, a lender can request a proportion of the savings made.
SHG’s nine lenders, including main funder Lloyds, told the organisation that collapsing its structure would mean re-pricing its £450 million loan book, costing the group between 1 per cent and 1.5 per cent more to service.
Rather than stump up the extra cash or ditch the plans, SHG formed a virtual board structure to move the group towards a single organisation without breaching loan agreements (Inside Housing, 5 November 2010).
A virtual board structure involves reducing the number of board members by having a core who sit on different boards. The boards remain as separate legal entities but meet together.
Sector figures have speculated that virtual structures are being used to strengthen associations’ positions in their negotiations with lenders.
But, argues Mr Morris, ‘the idea that this enables us to put particular leverage on our lenders is, I think, frankly overplaying it’.
Whether the virtual structure has played a part or not, Mr Morris hints at a softening of the lenders’ position. He says: ‘We are now in a position where we think we can have a serious discussion with our funders about the legal collapse of the group structure on terms we would find acceptable.’
Mr Morris describes this collapse as his ‘primary governance objective’ and hopes to achieve it by 2014 and save £2 million in the process. ‘If you talk to a lot of organisations which have traditional group structures, some of the problems they find are that they get multiple decision making, which wastes time’, says Mr Morris.
While Mr Morris is anxious to restructure the group, he is also concerned about the government’s affordable rent programme.
SHG, which was ranked 50 in Inside Housing’s top 50 developing associations, has bid to build 900 homes, a drop of around a third compared with previous years. It is not planning to build anything larger than three-bed homes because of worries that 80 per cent rents on larger homes could fall foul of the government’s £26,000 a year benefit cap. Mr Morris is not considering rents at less than 80 per cent on larger properties because he does not think extra grant will be available to make up for the loss in rental income.
He is also concerned about debt and says long-term exposure to the affordable rent model would put SHG in breach of its lending agreements.
‘SHG would have to think very carefully about another round of this sort of scale at the end of the four years,’ he says. ‘I don’t think this is a model that is sustainable in the long term.’
Mr Morris does see some positives coming out of Whitehall however. He hopes the government’s ‘big society’ agenda will provide opportunities for housing associations, specifically for his in-house contractor Spectrum Property Care, which has a turnover of £21.7 million. He says: ‘There is a real opportunity for an organisation like that which is skilled in facilities management and property services to offer services to local authorities and health trusts.’