What went wrong at Swan? The full story of a housing rescue
In February, struggling landlord Swan was absorbed into giant association Sanctuary as a subsidiary. It was the conclusion of a years-long attempt to find a future for the smaller landlord. Stephen Delahunty traces what went wrong and how the rescue was carried out. Illustration by Klawe Rzeczy. Photography by Simon Brandon
In February, struggling landlord Swan was absorbed into giant association Sanctuary as a subsidiary. It was the conclusion of a years-long attempt to find a future for the smaller landlord. @StephenD_ traces what went wrong and how the rescue was carried out #UKhousingIn February, Sanctuary merged with Swan, bringing to an end two years of turmoil for the smaller landlord. But what went wrong at Swan? And why did 105,000-home Sanctuary get involved in rescuing an association that many have described as an “outlier” in the sector?
Essex-based Swan was formed in 1994 under the leadership of John Synnuck, who grew it into an 11,000-home association. He retired around two months before it was rated non-compliant by the regulator.
Mr Synnuck could not be reached for comment.
The organisation garnered headlines in 2017, when it became one of the first housing associations to open its own factory, to build cross-laminated timber homes.
Three years later it expanded, opening a second factory for light gauge steel modular housing. Swan set itself an ambitious target to manufacture 10,000 factory homes a year by 2027. These factories would come to play a key role in the association’s troubles. Also at play was an ambitious development pipeline.
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In December 2021, the Regulator of Social Housing (RSH) downgraded the landlord from G2/V2 to G3/V3, meaning it was non-compliant with both elements of the Governance and Financial Viability Standard.
The same day, Orbit announced discussions with the landlord to create a 60,000-home organisation.
As merger discussions progressed, Swan revealed in May 2022 that it had pulled out of a partnership with G15 landlord Catalyst to deliver 359 shared ownership homes on an industrial site in east London. No reason was given by the associations for the decision, but Inside Housing was told that Swan would not receive any money from Catalyst as a result of it quitting the scheme.
Later in May, a regulatory notice revealed that Swan had breached the Decent Homes Standard after it was found by the RSH to have around 1,500 overdue fire safety remedial actions.
By September 2022, the merger was cancelled. Orbit announced that the merger would not go ahead in a stock market update. It provided few details – Orbit simply said the decision came “following a lengthy and detailed due diligence process”. Orbit declined to put anyone forward for this story to explain why talks broke down. It would later be revealed in a stock market update that Orbit had lent sums of £40m to the troubled landlord in October 2022, before merger talks broke down. This was repaid the following month (November 2022) by Sanctuary.
But behind the scenes, how did Swan end up in this position? And how did Sanctuary come to the rescue?
Sources tell Inside Housing that it was well known that the association had taken an entrepreneurial approach to risk that bet heavily on modern methods of construction, alongside an over-reliance on in-house contractors to deliver on its development pipeline.
By the time the merger agreement with Sanctuary was reached on 8 February, Swan had run up a group impairment of £186.5m in the year to the end of March 2022. An impaired asset is one that has a market value less than the value listed on a landlord’s balance sheet.
This left it with a £130.8m deficit in its last full year as an independent business, after it booked the huge impairment losses caused by problems on six major development schemes.
Swan’s problems have centred on its development projects at Beechwood, Laindon, Watts Grove, Blackhorse Yard, Exmouth and Purfleet.
The schemes represent a pipeline of more than 6,000 homes. Work on the £1bn regeneration of Purfleet town centre began in April 2021, with a plan to build 2,850 homes.
Swan took on the scheme after L&Q, a landlord around 10 times its size with 105,000 homes, pulled out in October 2017. L&Q declined to explain why at the time, and would not put anyone forward to discuss the reasons for this feature. But other sources with knowledge of the scheme told Inside Housing they believed the Purfleet scheme was too big for Swan and it should not have stepped forward to take the scheme on.
“The old management were very development focused, and they ran up a lot of investment and a lot of risk, which due to the pandemic and the economic uncertainty just isn’t coming together in the way they thought it would,” says the source.
Schemes on hold
The last time Swan appeared in Inside Housing’s Biggest Builders survey of the sector was in 2020, when it completed 708 homes – the equivalent of 6.5% of its total stock in that one year. Swan refused to respond to the sector-wide survey in 2021 and 2022.
In May 2022, Inside Housing reported that the latter phases of the Craylands Estate in Basildon, with plans for 1,310 homes, were on hold due to financial issues.
When Swan’s final accounts for its last full year as an independent business came out in February, they revealed “significant challenges” in its commercial operations for the year ending March 2022, “largely as the result of investment decisions implemented by the previous management of the business”. Swan’s regulatory rating remained at G3/V3.
The accounts add: “At a subsidiary level, these challenges have led to cost overruns, delays to works and thus sales have been slower to materialise.” The landlord’s debt had also increased – although it did not provide a figure – as a result of loans to its subsidiaries.
Those accounts show that most of the association’s developments were handled by its subsidiary, Swan Commercial Services, which operated its modular housing facilities and built homes for another subsidiary, Swan New Homes.
“This meant that all the commercial risk involved in constructing these homes was held by the Swan Group rather than passed to contractors, as is more common in the sector,” its accounts say.
That takes us back to the modular housing factories. As recently as March 2021, industry publication Offsite Hub was hailing Swan’s story under the headline “Swan showing the way forward”. But by December 2022, Swan shut down both factories, revealing that they had struggled to make a profit. Swan booked a £16.6m impairment on its second modular factory alone.
Despite these risks, Inside Housing understands that there was no problem in persuading Sanctuary to step in after the talks with Orbit broke down, and it is unknown if any other associations were approached. Part of the reason Sanctuary says it stepped in is that it is “financially strong, well run and has an experienced team in place to help Swan manage its challenges”.
In numbers
2
Modular factories shut by Swan, only five years after the first factory opened
£16.6m
Impairment on one of the modular factories
£67.4m
Gross loss for subsidiary Swan New Homes in 2022
Negative outlook
Credit ratings agencies Moody’s and S&P have both given Sanctuary a ‘negative’ outlook after the rescue was completed. Despite this negative outlook, Moody’s said its rating was “underpinned by the favourable terms that Sanctuary and Swan have agreed with Swan’s lenders and bondholders, including waivers related to historical breaches of Swan’s lender covenants”.
During the negotiations, it was revealed in January by Inside Housing that Swan had convened a meeting of bondholders on its £250m publicly listed finance package agreement to agree a waiver on any covenant breaches.
M&G Trustee, a corporate trust company that manages the bond, said a breach had occurred under the terms of the loan agreement, as the landlord had failed to deliver its audited financial statements, including its balance sheet and profit and loss account. M&G Trustee declined to “serve the notices” of breaches while the merger discussions were ongoing and later refused an offer to talk to Inside Housing.
A covenant breach is significant because it can leave an association being judged to be non-compliant with the RSH, if not already as is the case with Swan, and leave landlords facing breakage costs – a financial penalty that is inserted into loan agreements.
Piers Williamson, chief executive at affordable housing aggregator The Housing Finance Corporation, says: “It was the first time it’s played out in public in this way as they had public bonds.”
Public bonds are traded on the stock market, so must abide by stock market rules on disclosure of information material to investors and potential investors.
“It was probably the most complicated [housing association rescue] to date and bigger than Cosmopolitan,” Mr Williamson continues.
He was referring to Sanctuary’s merger with Cosmopolitan in 2013, when the latter fell into trouble after financial issues put it on the brink of insolvency. Sanctuary inherited around £100m of onerous leases taken out to fund Cosmopolitan’s student housing business.
Mr Williamson adds: “It’s great for [Swan’s] tenants, they have safe harbour at Sanctuary, and they have a great record in orderly management.” It appears that track record is going to come in useful.
NU Living is a trading name of Swan New Homes, and it is still advertising private sale and shared ownership apartments in Blackwall and Walthamstow.
Companies House disclosures for Swan New Homes show that four directors and the company secretary’s contracts were terminated in February. It reported a gross loss of £67.4m in 2022, alongside a staff turnover of more than 31%.
A Sanctuary spokesperson said: “We can confirm that work addressing the challenges at Swan and our business integration is progressing. We are providing updates to staff, stakeholders and residents. As part of the integration, we are undertaking a detailed review of Swan’s development plans to ensure they will deliver for their local communities and are financially viable.”
Ratings agency S&P expects Swan to exit some of its “non-viable” schemes, and predicted that Sanctuary will scale back development to keep debt down. In 2022, Sanctuary completed 1,121 homes, making it the ninth-biggest builder according to Inside Housing’s survey.
Inside Housing asked Sanctuary if redundancies could be expected in Swan’s development team and subsidiaries, but the association did not directly respond to this question.
“No decisions have been made regarding specific Swan developments and we are committed to consulting local stakeholders as we complete our review. The acquisition of Swan will not impact Sanctuary’s development programme,” said the Sanctuary spokesperson.
Swan: a timeline
1994
- Essex-based Swan was formed under the leadership of John Synnuck, who grew it into an 11,000-home association.
2017
- Became one of the first housing associations to open its own MMC factory.
- In the same year, it took on a huge 3,000-home scheme from L&Q, after the landlord, which is around 10 times its size with 105,000 homes, pulled out.
2020
- Opened its second MMC factory, with plans to build 10,000 homes per year.
2021
- Downgraded by RSH in December from G2/V2 to G3/V3.
- The same day, Orbit announced discussions with Swan to create a 60,000-home organisation.
2022
- As merger discussions progressed, Swan pulled out of a partnership with G15 landlord Catalyst to deliver 359 shared ownership homes in May.
- In the same month, a regulatory notice revealed that Swan had breached the Decent Homes Standard as a result of around 1,500 overdue fire safety remedial actions.
- Sanctuary announced that it was in merger talks with Swan in September, on the same day as discussions with Orbit ended.
- The following month, a stock market update revealed that Orbit had lent sums of £40m to the troubled landlord in October, before merger talks broke down.
- Sanctuary repaid the sum to Orbit in November.
- Swan shut down both modular factories at the year after they had struggled to make a profit.
2023
- At the start of the year, Swan had convened a meeting of bondholders on its £250m publicly listed finance package agreement to agree a waiver on any covenant breaches.
- Merger agreed with Sanctuary on 8 February, but final accounts revealed Swan had run up a group impairment of £186.5m in the year to the end of March 2022.
Sanctuary’s public statements so far have focused on the stability it will provide to Swan as opposed to the benefits the merger will bring to Sanctuary. The landlord did not want to be drawn into providing an update on what those benefits might be until its development review is completed.
In the short term, James Tickell, a partner at consultancy Campbell Tickell, says: “For at least the second time, Sanctuary has stepped in and rescued a failing organisation and the entire sector has a debt of gratitude for what they’ve done.”
The RSH was given additional powers in July 2018 to protect tenants if an association went bankrupt, which likely means tenanted stock would be sold to another provider, as opposed to being sold on the open market.
But as one housing professional told Inside Housing, letting things get to that point “would probably make the borrowing costs of the entire sector more expensive”.
For its part, the regulator welcomed the merger as it has “protected tenants’ homes and ensured they stay in the social housing sector, as well as ensuring that Swan’s creditors remained whole”.
While Swan’s tenants have found safe harbour with Sanctuary as the landlord earns the sector’s plaudits for a second time, who is going to step in the next time a major association gets into trouble?
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